In June 2025, the Federal Reserve held its benchmark interest rate steady, a key tool to influence the economy. While the Fed takes a “wait and see” approach to future interest rate cuts, investors can reap the benefits from historically high yields at the front end of the curve. Ultrashort bond funds, which typically carry durations of less than a year, allow investors to capitalize on this market opportunity while also protecting against interest rate volatility.
Because of the current shape of the curve, with short-term yields exceeding medium-term maturities, investors can secure higher income without venturing further along the yield curve or assuming greater interest rate risk.
In June 2025, the typical ultrashort bond strategy generated a 4.5% SEC yield, while the average intermediate core bond fund yielded 4.3%. Three years prior, at the onset of the Fed’s rate-hiking campaign in 2022, the average ultrashort bond fund produced a yield of less than 1.0%.
While ultrashort bond strategies deliver relatively smooth performance during interest rate fluctuations, some carry credit risk that can trigger drawdowns, albeit mild, in weak credit markets. Below are two of our favorite actively managed ultrashort bond options for navigating the current market uncertainty.
Veteran leadership, strong collaboration, and a time-tested process make Pimco Short-Term PSHAX, which receives a Morningstar Medalist Rating of Bronze, a top selection among its ultrashort bond peers. Lead manager Jerome Schneider heads a deep team of dedicated ultrashort specialists. This, along with a flexible approach that focuses on the short-term and liquidity markets, distinguishes this strategy from its competition.
Schneider and team use the full range of their 0 to 1.0-year duration band based on their outlook, while competitors often maintain static durations. They avoid structured bonds with volatile cash flows, which limit unexpected duration extension, and Pimco has proved its ability to effectively manage these complex instruments and identify mispriced securities between cash and derivatives markets. The team allocates 50% to 70% of assets to the corporate and securitized sectors and actively adjusts exposures based on its assessment of relative value and risk.
With a 4.4% SEC yield and a 0.1-year duration as of June 2025, this fund offers an attractive option for investors seeking high income with minimal interest rate risk. Investors can also access a sibling active exchange-traded fund in Pimco Enhanced Short Maturity Active ETF MINT.
For tax-sensitive investors, Silver-rated Vanguard Ultra Short-Term Tax-Exempt VWSTX stands out as a solid pick on the short end of the municipal-bond yield curve. The strategy’s disciplined and risk-conscious approach consistently gives it an edge over peers. The team closely aligns the portfolio’s duration with that of the benchmark, the Bloomberg Municipal 1 Year Index, but makes tactical adjustments based on guidance from its senior investment committee.
This strategy’s ultrashort approach makes it a mismatch for the muni-national short Morningstar Category, which features strategies with durations as long as 3.0 years. The June 2025 portfolio’s 1.3-year duration was over a year shorter than the typical peer’s. As such, the fund will likely outperform during rising yield environments but lag its peers when rates fall.
In June 2025, the fund delivered a 3.1% SEC yield, with muni bonds’ federal tax exemption further enhancing the appeal of its income to investors in higher tax brackets. With the continued benefit of ultralow fees, this remains one of the top choices for investors seeking high-quality exposure to the shortest segment of the muni market.
This article first appeared in the June 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.
