Short duration bonds: your first step out of cash
- 12 February 2025 (3 min read)
Short duration bonds may have a role to play in an investor’s portfolio regardless of the market cycle. But especially in uncertain times, investors looking to enhance cash returns might consider taking an intermediate step into riskier assets for a modest pick up in yield via short duration bonds.
An actively managed portfolio can aim to reduce risk through diversification and careful company selection.
Where exactly are short duration bonds on the risk spectrum?
Short duration bonds are generally less volatile than longer-duration bonds, as they are less sensitive to changes in interest rates. In approximate terms, a bond’s duration will tell you how its value will be affected by every 1% move in interest rates.
Short duration bonds typically have a maturity of between one and five years (at the upper end), with their value likely to be significantly less affected by interest rates than longer-dated bonds. This makes them an interesting option for those looking to move out of cash. They are generally higher yielding than money market funds, a common alternative in the past for cash investors.
Alternatives to cash
- Money market funds
Low risk but cash-like yields offer little extra return - Short duration bonds
Modest pick-up in yield and low overall capital volatility - Longer-dated fixed income
Higher pick-up in yield over cash but more sensitive to rising interest rates
While short duration issuers can encompass a wide variety of borrowers (i.e. governments to high yield companies), the short lifetime of a bond helps to reduce the risk of a company defaulting on its debt.
Where exactly are short duration bonds on the risk spectrum?
Why AXA IM for short duration bonds?
We have significant experience across fixed income at AXA Investment Managers, including 11 specialist short duration bond strategies1 . Our depth of expertise allows us to cover all major investment regions, including new markets such as Asia and China.
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| dedicated short duration strategies, spanning the full fixed income risk spectrum across investment grade credit, high-yield, US, European, Emerging markets, Asian, aggregate, and responsible strategies | years' experience in managing short duration strategies | fixed income investment professionals located in every major market around the world |
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Our investment philosophy fits well for investors looking to move out of cash. Our focus on income generation as the key driver of fixed income returns lends stability to our fixed income portfolios.
We invest only in cash bonds with a maturity or expected call date of below five years. We also tend to hold bonds to maturity, rather than overtrading the portfolio. This helps to limit the range of extreme scenarios the portfolio could experience. Even if interest rates were to rise dramatically, the low sensitivity of short duration bonds would help to limit any capital volatility.
Short duration bonds offer the potential for a reasonable pick-up in return without forcing investors to take too much additional risk with their capital
Nicolas Trindade
Lead Portfolio Manager - Global Short Duration
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