The case for short-dated bonds in an uncertain world

One of the salient investment trends of 2025 was the popularity of safe havens. The gold price (a beneficiary of the falling dollar as well as a flight to safety) rose 65% last year¹, whilst money market funds raked in a record £5.8bn of net new inflows from UK-based investors, according to Calastone’s Fund Flow Index². 

To put this another way: if you were worried about Donald Trump’s tariffs and unpredictable policy-making, the UK economy and the autumn Budget, and/or an AI bubble bursting – and the impact of all of this on your investment portfolio – then it seems you weren’t the only one. In light of events on the streets of Caracas in early January 2026, followed by Donald Trump’s threats to invade Greenland before a deal was reached, geopolitical tension shows no signs of abating this year. 

The silver lining for investors in this uncertain world is that there are plenty of low-risk options to protect and grow their savings. Here in the UK, the Bank of England’s base rate of 3.75% means that many savings accounts are kicking off a decent yield. At the time of writing, best-buy cash ISA and easy access accounts³ were offering interest rates of 4.4% and 4.5% respectively (although both of these headline numbers include bonuses for the first 12 months, after which their interest rates will plummet).  

Short-dated bonds versus money market funds and cash 

With savings accounts paying out such generous rates at present, why should savers risk their money anywhere else?  

The answer to that question is interest rates. If the Bank of England cuts rates this year, as we expect, returns from money market funds and savings accounts are likely to fall commensurately. 

Money market funds have become popular as a way to make cash work harder without moving too far up the risk curve. But we would argue that in the current environment, it is well worth taking one step further out along the risk/return continuum and moving from saving to investing – especially for those concerned about interest rates and inflation, and who can afford to take a little bit more risk for some extra return. 

Performance of the Artemis Short-Duration Strategic Bond Fund vs money market funds

Past performance is not a guide to the future. 

Source: Lipper Limited, class I accumulation shares in GBP as at 31 December 2025. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. The Artemis Short-Duration Strategic Bond Fund was launched on 3 December 2019.  

Performance is presented versus the IA Standard Money Market sector as a proxy for investing in a cash fund. The purpose is to demonstrate the performance of the strategy versus making an allocation to cash. Please note that these asset classes have different risk profiles and the potential for capital losses in the Artemis Short-Duration Strategic Bond Fund is greater.  

This step further along the risk/return path takes us to short-dated bond funds. With more flexibility and a far greater array of tools at the fund managers’ disposal to maximise returns, the yields and total returns from short-duration bond funds do not follow interest rates as closely as money market funds and cash accounts. 

By way of example: the core of our Artemis Short-Duration Strategic Bond Fund consists of short-dated investment-grade corporate bonds, but we have the flexibility to add high-quality, high-yield bonds to turbo-charge the fund’s income and we also have a government bonds sleeve. Here, we focus on pairs trading, for instance: long gilts, short treasuries; long index-linked gilts, short conventional government bonds; and another example would be curve trades. Over the long term, gilts, US Treasuries and German bunds are closely correlated, but those correlations can break down for short periods, sometimes dramatically so, creating tactical opportunities for us as active managers to implement relative value pairs trades. 

What happens to short-dated bonds when interest rates fall? 

Bond prices are negatively correlated with interest rates (because prices and yields move in inverse directions). So if interest rates fall and bond yields with them, the capital returns from bond funds would rise. And if the opposite happens and valuations fall, yields provide a cushion. 

Generally speaking, an environment of falling interest rates is considered to be a positive for bond markets because prices would rise – but a negative for money market funds because their yields would fall. 

In a rate-cutting environment, we would expect long-duration bonds to make more money than short-dated strategies in absolute terms, but what makes short-dated bonds so compelling, in our view, is their risk-adjusted returns.  

Short-dated bonds offer similar levels of income to all-maturity bonds

Source: Bloomberg as at 2 January 2026

Short-dated bonds have a fraction of the volatility of their full maturity cousins, far less exposure to interest rate and duration risk, and yields that are almost as high. 

Volatility of short-dated bond indices vs all maturity, January 2010 to present

Source: Bloomberg as at 2 January 2026

Short-dated bond funds are designed to harvest income and deliver steady returns without being as vulnerable to sudden market shifts as long-duration securities. What this means in practice is that investors are getting healthy compensation for the investment risk they are taking – ample reward, in our view, for taking that one step up from money market funds.

Why should investors consider an allocation to short-duration bonds?