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Investing in short duration

Offers a first step onto the credit ladder with potentially less uncertainty.

Our expertise1Source: AXA IM as of 30th September 2024

11
dedicated short duration strategies2includes strategies only registered in individual countries
€14 bn
AUM
+20 years
experience

Overview

A short duration bond is generally a bond with a short time to maturity. At AXA IM we define this period as 5 years or less. Short-term bonds tend to carry less uncertainty because the principal is repaid more quickly and can be reinvested earlier. However, duration is more than just term to maturity.

Maturity versus duration

Maturity is simply the number of years left until the bond’s principal is repaid. Duration takes maturity into account but also bond coupon rates and yield. When coupons are included, the bond's duration number (in years) will always be less than the maturity number. Generally, bonds with shorter maturities or higher coupons will have shorter durations.

What does duration indicate?

Duration is considered an indicator of one of the key risks in fixed income– interest rate risk. The calculation of duration essentially measures how sensitive the value of future cash flows is to changes in interest rates. The shorter a bond’s duration, the less the bond’s price will change when interest rates move, thus short duration bonds are less exposed to interest rate risk.

Why is duration useful?

Duration is a useful tool in helping to manage fixed income portfolio risk. First, it allows the portfolio manager to compare the risk sensitivity and potential price volatility of bonds with differing yields, prices, coupons and maturities. Furthermore, depending on the manager’s view on interest rates, they can adjust the average duration of the portfolio accordingly, moving shorter if a rate increase is expected (i.e. buying shorter dated bonds), or longer if a rate cut is expected.

Why short duration?

Short duration strategies can play a strategic role in an investor’s portfolio by potentially mitigating interest rate risk, managing liquidity, enhancing cash returns and providing potentially steady and consistent income while limiting volatility regardless of the market cycle. Short Duration is not one homogenous asset class and offers a range of outcomes for different investors needs. These outcomes are not mutually exclusive and many of the investment offerings may offer two or more of these outcomes.

Short duration strategies, with their typical maturities of up to three or five years, should offer a suitable bridge between cash holdings and longer-term fixed income investments. This is because they allow for harnessing income, while mitigating the impact from rates or spread volatility.

Short duration strategies could act as a tool to generate positive total returns in an uncertain environment given their natural income generating component. Short duration bonds within asset classes such as high yield or emerging markets may therefore be an option to access higher income and growth while still mitigating against interest rate risk.

While the benefits of core short duration strategies such as investment grade credit and high yield bonds are clear, other fixed income sub-asset classes, such as inflation linked bonds or emerging markets are less discussed. However, these strategies could reduce correlation to traditional fixed income assets, thereby enhancing risk-adjusted returns.

Many investors may look for a flexible approach during periods of uncertainty as it provides the potential to exploit opportunities available in the global short-dated fixed income universe via active asset class and sector allocation as well as active management of duration across currencies.

Investors targeting net zero objectives or wanting to generate positive and measurable real word outcomes can also do this through short duration strategies without compromising on returns.

Our strategies

Carbon Transition Global Short Duration

Euro Short Duration

Euro Credit Short Duration

Global Inflation Short Duration

US Credit Short Duration

Asian Short Duration

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Risk warning

No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes specific risks, liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.

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