Short Duration Bonds

Short duration bonds are the solutions for investors who are seeking a way to mitigate the impact of market volatility - because of the ever-changing directions of interest rates - and an attractive risk-return profile.

What are Short Duration bonds?

Short Duration bonds are bonds with a short time to maturity, typically less than five years.

Why consider Short Duration bonds?

Short Duration bonds may be a useful tool in mitigating the risks of both rising yields and market volatility. As a result of Short Duration bonds having less time to maturity, they are less sensitive to rising yields. For a similar reason, Short Duration bonds allows more flexibility for bond manager to position their portfolio based on their view on interest rates - they can adjust the average duration of the portfolio accordingly, moving shorter if a rate increase is expected, or longer if a rate cut is expected - making them less volatile in general than longer duration instruments.

Our approach to Short Duration

Our Short Duration strategies generally invest in bonds with maturities of five years or less, or that are expected to be redeemed/called in five years or less, and seek to capture high current income with low overall volatility.

Potential benefits of investing in short duration bonds

  1. Ability to mitigate the impact of market volatility: Short duration investing offers lower volatility and drawdowns when compared to the wider, all maturities markets. This is predominantly because the price of bonds that are closer to maturity tends to be closer to par than longer duration bonds, and the discounted value of coupon payments is less sensitive to changes in interest rates.
  2. Lower sensitivity to interest rate cycles: 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.
  3. Increases portfolio liquidity: Exhibiting a naturally attractive liquidity profile, due to regular cash flows from maturing bonds and coupon income, a short duration strategy is able to minimise turnover when implementing active strategies. Holding bonds until their maturity also implies lower transaction costs, which may improve returns over the long-term
  4. Intermediate step into riskier asset classes: Investors seeking higher yields may consider looking beyond domestic markets towards Asia, high yield and emerging markets, where short duration products may offer an attractive risk-return profile.

 

Why AXA Investment Managers for short duration bonds?

Broad product offering: Whether investors are looking for a higher yield or to combat inflation, AXA Investment Managers offers solutions to different investment needs, including investment grade, high yield, Asia, emerging markets and inflation.

A tried and tested approach: A common investment philosophy seeks to capture potential income in short dated securities, while minimising default risk (a strict sell discipline is triggered by deteriorating fundamentals, insufficient liquidity or lack of financial transparency). A team approach to decision making is aimed at promoting consistency of returns and close monitoring of risks.

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