Ultra-short-dated credit: steady returns in a changing rate environment

Global interest rates are falling. Investors are asking how to make their cash work harder, without taking excess risk. Enter ultra-short-dated credit: bonds maturing in less than a year, offering a cash-plus outcome backed by a proven record of consistency and low volatility.

Proven resilience through market cycles

From February 2006 to September 2025, the US ultra short-dated credit sector has delivered positive calendar-year returns every single year – a remarkable level of consistency rarely seen in fixed-income markets.

What sets this sector apart is its ability to match the returns of longer-dated peers – such as the one-to-three year, one-to-five year, and all-maturity US credit sectors – while taking on far less risk. Volatility has been approximately two, three, and seven times lower than those segments, respectively, and consistently below 1% on a rolling basis.

Risk-adjusted performance is equally impressive, with the 10-year Sharpe ratio the highest among its peer group. (The Sharpe ratio measures how much excess return an investment delivers for each unit of risk, so a higher number indicates better risk-adjusted returns.) Notably, over the same timeframe, ultra-short-dated credit has outperformed cash on a one-year rolling basis in 92% of the periods. 

This resilience is especially relevant in today’s environment. Investors are seeking to balance liquidity with the desire for enhanced returns. Ultra-short-dated credit delivers on both. Its ability to deliver steady, positive outcomes – even in times of market stress – makes it a valuable component to a portfolio.

Why not just allocate to money-market funds?

Money-market funds are a common choice for liquidity. But their strict rating restrictions – typically AAA and AA securities – mean they often miss the broader opportunities within ultra-short-dated credit. As the yield dispersion chart demonstrates, moving down the ratings spectrum within the zero-to-one year index offers a meaningful pick-up versus cash. With careful selection, investors can access enhanced yield without taking on excessive risk. 

This yield advantage becomes more important as central banks start cutting rates. While money market yields are likely to drift lower, ultra short-dated credit can remain more resilient – especially when active managers are able to select from a wider universe of securities.

Beyond benchmarks: flexibility that drives value

Funds constrained by benchmarks often have limited ability to invest in ultra-short-dated bonds. Many of these securities fall outside major indices, restricting the scope for benchmark-relative funds to fully participate in this opportunity.

While they can take some active positions, significant non-benchmark securities are usually off-limits. This reduces flexibility and the potential for meaningful yield enhancement from a low-volatility asset class.

Harnessing the advantages of ultra-short-dated credit requires a flexible approach, unconstrained by index requirements. A benchmark-free strategy opens access to a broader range of credit and enables dynamic portfolio adjustments as market conditions evolve. The result? Greater value and a cash-plus outcome, enhancing portfolio returns and durability.

Final thoughts…

Ultra-short-dated credit offers a rare combination of consistent positive performance, low volatility, and attractive risk-adjusted returns. These unique characteristics make it an ideal choice for investors seeking to enhance cash returns in a changing rate environment – especially as money-market yields begin to drift lower.

By adopting a flexible, active approach, investors can unlock the full potential of this asset class, delivering a cash-plus outcome while effectively managing risk.

At Aberdeen, we offer the Short Dated Enhanced Income Fund, a strategy designed to capture these benefits. Discover more about the fund – including pricing and performance – here