With the start of the second quarter, investors are once again embracing fixed income investments, which had fallen out of investors’ favor over the equities due to interest rates hike speculations. This is especially true amid increased market volatility and heightened uncertainty that dampened the appeal for riskier assets in recent weeks.

A spate of disappointing economic data, weak corporate earnings, the prospect of slower-than-expected interest rates hike, strong dollar, Greece default concerns as well as China’s tighter trading rules are boosting the demand for safe havens like Treasury bonds (read:Active Bond ETFs Head to Head: BOND vs. TOTL).

Weak U.S. Data

Both industrial and manufacturing activities are showing signs of a slowdown, suggesting that the U.S. economy is losing momentum this year.

Industrial production dropped 0.6% in March, worse than the market expectation of a 0.3% decline and the biggest monthly drop in more than two-and-half years. In the first quarter, it fell 1% year over year, representing the first quarterly decline since the second quarter of 2009. Manufacturing activity, as depicted by the ISM's Manufacturing Purchasing Managers Index, fell for five months in a row to 51.5 in March from 52.9 in February. This represents the lowest reading in almost two years.

Meanwhile, inflation rose 0.2% last month on rising gasoline and housing prices as well as higher medical costs. The housing market was also off to a weak start this year due to frigid weather. Additionally, the IMF reduced its growth outlook for the U.S. economy last week to 3.1% for this year and the next from 3.6% and 3.3%, respectively, projected previously.

In such a backdrop, equities returns are at risk and investors are seeking safety in their portfolio. This can be well served by investing in Treasury bonds, which offer a nice mix of safety and income during turbulent times. And the current conditions for bond investments seem better, which will add to the strength (see: all the Government Bond ETFs here).  

Current Bond Trends Assuring

The Fed laid the foundation for the first interest rate hike in the U.S. since 2006 by dropping the word ‘patient’ but committed not be impatient and provided a cautious outlook on inflation and economic growth. This suggests that the interest rate hike is unlikely until later this year and that the near-zero interest rate policy will stay in place for longer than expected, spreading an air of optimism in the fixed income space.

Further, the European Central Bank (ECB) started its bond-buying program in March as part of its plan to purchase €60 billion bonds per month through September 2016 that has pushed the European yields lower. This action is also boosting the allure for the U.S. bonds (read: 3 Bond ETFs for Yield and Growth if Rates Stay Low).

While many bond ETFs have the potential to outperform, we have highlighted three short-term Treasury bond funds that could better withstand the current market turmoil given no or minimal interest rate risk and lower default risks. Any of these could be excellent picks and will likely see smooth trading in coming weeks given their favorable Zacks ETF Rank of 3 or ‘Hold’ rating.  

iShares 1-3 Year Treasury Bond ETF ((SHY - ETF report))

This fund tracks the Barclays U.S. 1-3 Year Treasury Bond Index and holds 93 securities in its basket. About 57% of the bonds mature in 1–2 years with average maturity of 1.85 years and effective duration of 1.82 years.  SHY is the most popular and most liquid ETF in the short-term bond space with AUM of $8.6 billion and average daily volume of more than 1.3 million shares. Expense ratio came in at 0.51% and 30-day SEC yield stands at 0.40%.

Schwab Short-Term U.S. Treasury ETF ((SCHO - ETF report))
 
With AUM of $716 million, this fund follows the Barclays U.S. 1-3 Year Treasury Bond Index and is the low cost choice in the space charging just 8 bps in annual fees. Volume is moderate as it exchanges 126,000 shares in hand a day on average. The product holds 71 securities in its basket with average maturity and effective duration of 1.9 year each. The 30-day SEC yield for the fund stands at 0.47% (read: Time for Junk Bond ETFs?).
 
Vanguard Short-Term Government Bond ETF ((VGSH - ETF report))

This fund provides exposure to 147 securities by tracking the Barclays U.S. 1-3 Year Government Float Adjusted Index. It has average maturity and average duration of 1.9 years each. The product has managed 581.1 million in its asset base while trades in volume of under 100,000 shares a day on average. It charges 12 bps in fees per year from investors and has a 30-day SEC yield of 0.48%.