Short duration bonds: a natural complement to corporates’ cash allocation

Cash is no longer king

In the recent past, there was little opportunity cost to holding cash compared to short-dated bonds as interest rates and short-dated bonds yields were close to zero and inflation remained subdued. Cash also proved to be a safe haven for corporates as interest rates rose sharply in 2022.

But now the dynamic has shifted. Central banks have begun – and are expected to continue – cutting base interest rates, leading to lower cash returns. Meanwhile, elevated and sticky inflation is eroding real returns (nominal returns minus inflation).

As a result, cash yields have decreased over the past two years, while short-dated bonds yields have also declined, but to a lesser extent. This means that short-dated bonds yields now offer a premium of 80bps over cash. Furthermore, the real yield (including inflation) for cash investors was only 0.1% as at August 2025, making short-dated bonds a potentially attractive alternative to mitigate the negative impact of continuing high inflation.

Additionally, there are pressures stemming from political uncertainties and US tariffs that could further increase costs and impact margins over the long term, highlighting the importance of an optimised cash management strategy. 

Yields on cash have fallen faster than short-dated bonds while persistent inflation undermines real returns

Past performance is not a reliable indicator of future results.

Source: AXA IM, Bloomberg as at 31/08/2025. Left hand chart: The graphic represents the short-dated sterling corporate index and cash yields. Short-Dated Sterling Corporate Index is represented by the ICE BofA 1-5 Year Sterling Corporate & Collateralized Index. Cash is represented by the ICE BofA British Pound 3-Month Deposit Bid Rate Average Index (L5BP). Right hand chart: The graphic represents the evolution of the UK CPI as represented by the UKRPCJYR Index. Latest data available is at 31/08/2025.

Short-dated bonds, a natural and compelling solution to enhance cash returns

The dual challenge of higher operating expenses and lower cash rates means that corporates need to consider additional alpha sources to achieve greater real returns on cash. In a falling rates environment, there is an opportunity cost to staying invested in cash or money market funds as not only does the yield on cash keep falling as central banks cut interest rates, but you also miss out on the expected positive performance of short-dated bonds on the back of lower front-end yields.

Short-dated bonds can help address corporates’ challenges as they offer yield enhancement, provide a regular steady income, and have natural liquidity, with limited additional sensitivity to interest rate and credit spread moves. They can also provide a natural funding source, with regular dividend distributions.

Short-dated bonds have provided superior returns to cash over the last three years with limited extra volatility 

Past performance is not a reliable indicator of future results.

Source: AXA IM, Bloomberg as at 30/09/2025. For illustrative purposes only. Cash is represented by the ICE BofA British Pound 3-Month Deposit Bid Rate Average Index (L5BP) and the short-dated sterling corporate index (SD £ Index) is represented by the ICE BofA 1-5 year Sterling Corporate & Collateralized Index (UC0V).

Short-dated bonds have outperformed cash rates by +10% over the last three years with limited extra volatility. A £50m strategic cash allocation split 50/50 between cash and short-dated bonds generated circa +5% (£2.6m) more than a 100% allocation in cash over the last three years, demonstrating the effectiveness of using short-dated bonds to enhance cash.

We believe that an optimised approach is not all in cash or money market funds, but rather a tiered liquidity waterfall including short-dated bonds. In this way, corporates could benefit from higher yields and predictable income with limited additional volatility, while being better aligned with their longer-term goals and risk profile.

Why AXA Sterling Credit Short Duration Bond Fund?

Active management  - Opting for active managers such as AXA IM in the short-dated bond universe compared to passive solutions offer additional advantages such as default risk mitigation, the avoidance of forced sales and the potential for further yield enhancement though careful bond selection and active changes in asset allocation.

Designed to complement cash holdings – The AXA Sterling Credit Short Duration Bond Fund is designed for investors looking for a reasonable pick-up in return compared to cash, without taking too much additional risk with their capital.

Conservative approach – The fund follows a conservative approach, with a significant emphasis on limiting drawdowns and generating income. This high-quality fund is unconstrained and actively managed, enabling the investment team to exploit investment opportunities across the short-dated sterling market (bonds with less than five years maturity), while targeting a minimum rating of A- at portfolio level. Additionally, the fund benefits from daily liquidity.

Recognised and longstanding expertise – The AXA Sterling Credit Short Duration Bond Fund is managed by a longstanding and multi award-winning investment team, with a proven track record of limiting drawdowns in market downturns, while generating attractive returns in up markets.

No assurance can be given that the AXA Sterling Credit Short Duration Bond Fund will be successful. Investors can lose some or all of their capital invested. The AXA Sterling Credit Short Duration Bond Fund is subject to risks including credit, ESG, interest rate, prepayment and extension, stock lending risks. Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.