The end of QE2 shouldn’t cause bond investors to panic. But it’s prudent to reduce your portfolio’s sensitivity to interest rate moves by bulking up on short-term bonds.

The Federal Reserve has kept interest rates artificially low for almost three years. Over this period, the Fed has declined to increase the benchmark federal funds rate and engaged in open market operations designed to keep real rates down. But the second round of quantitative easing (QE2) ended in June, and many investors now expect rates to rise, regardless of the Fed’s intentions.

At the time of writing, interest rates have yet to rise considerably. In fact, rates have declined by about 40 basis points since QE2 wound to a close. But fixed-income gurus, such as bill Gross of Pacific Investment Management Company, believe investors soon will demand higher compensation to hold government debt. Even conservative forecasts call for a 1.5 percent jump in 10-year treasury yields by the end of the summer. Now that the Federal Reserve is no longer in a position to purchase about 70 percent of the available supply of Treasuries—which it did throughout QE2—a 1.5 percent bump in yields is a possibility.

A rate move of this magnitude can wreak havoc on a bond portfolio’s value. But this is not the time for drastic action. Investors need not sell off long-term bond holdings in favor of shorter-term bonds. In fact, investors can realize higher overall yields while protecting the value of their holdings by lowering the duration of their bond holdings. This can be achieved with the addition of select short-term bond positions.

Thompson Plumb Bond (THOPX) is an aggressive short-term bond fund that courts credit risk while maintaining an extremely low 2.4-year duration. The fund’s performance tops its category on a three-, five- and 10-year basis. But there have been some dramatic swings in yearly performance that will occasionally plunge the fund to the bottom of its category.

Thompson Plumb Bond’s management team will invest in corners of the bond market that have fallen out of favor. For example, management made a strong move into corporate bonds in 2008 while most bond investors were expecting a meltdown. It takes conviction to go against the grain. The fund’s managers also run two equity funds that invest in companies that generate strong cash flows. This expertise allows Thompson Plumb Bond to hone in on high-yielding companies with the ability to repay debt.

Although this strategy produces significant volatility due to perceived credit risk, it also results in a yield of 3.2 percent—almost unheard of from a short-term bond fund.

For investors with less of an appetite for volatility, Vanguard Short-Term Federal (VSGBX) is a better option. The fund currently yields just 1.2 percent, but that yield should move higher in lockstep with interest rates. With a duration of just two years, Vanguard Short-Term Federal will protect investors’ principal as rates climb higher. The fund won’t provide much current income but it’s a solid option for investors who seek safety first.