Why Short Duration?

Ability to mitigate the impact of market volatility

By the nature of a lower duration and spread duration, short duration investing offers lower volatility and drawdowns when compared to the wider, all maturities markets. Short duration bonds are less sensitive to credit spread movements compared with longer duration bonds, implying lower volatility of returns than the broad market. This is predominantly because  the price of bonds that are closer to maturity tends to be close to par than longer duration bonds, and the discounted value of coupon payments is less sensitive to changes in interest rates.

Lower sensitivity to rising interest rates (yields)

One of the key risks of investing in fixed income is the capital eroding effects of rising yields. While we currently face a low (and in some countries negative) interest rate environment, should central bank policies prove to be successful and global growth picks up, investors are likely to face rising interest rates. Interest rates and bond prices usually move in opposite directions, therefore rising yields could have an adverse impact on bond prices. Due to their shorter maturities, short duration bonds may mitigate losses in periods of rising interest rates, as cash flows from maturing bonds can be reinvested at higher rates in the market.

Better liquidity than long duration bond funds

Exhibiting a naturally attractive liquidity profile, due to regular cash flows from maturing bonds and coupon income, enables a short duration strategy to minimise turnover when implementing active strategies. Holding bonds until their maturity also implies lower transaction costs, which can improve returns over the long term. Fixed income indices traditionally exclude bonds with maturities of less than one year.

The risk versus return profile

In a low interest rate environment, short duration bonds can offer an intermediate step into riskier asset classes for investors seeking incremental yields. Investors may consider looking beyond domestic markets towards Asia, high yield and emerging markets, where short duration products may offer an attractive risk-return profile.


AXA IM's short duration offering

AXA Investment Managers has over 15 years’ of experience in managing shortduration across 10 funds, with €15 billion* globally under management for a diverse client base.

*Source: AXA IM as at 31/01/2019