Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Short Duration Bonds

Offer a first step onto the credit ladder with less uncertainty

Fixed Income

The case for short duration investing

Nicolas Trindade explains why investors should consider short duration bonds and what the potential impact of falling interest rates would be on his portfolios.

Learn more

What are short duration bonds?

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 generally 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 investing – 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 an extremely 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.

Fixed Income

AXA IM US Short Duration High Yield

Download the booklet to view our latest strategy highlights

Learn more

Why consider a short duration strategy?

Traditionally, savers tended to look to two areas for low risk sources of income: either interest rates on cash deposits in the bank or governments bonds issued by the most credit-worthy governments. The problem is that these days, neither offers much in the way of income.

As a result, many have found the need to move up the risk spectrum in search of higher yields.  For more cautious investors, this solution may force them to accept more risk than they are comfortable with in an uncertain market environment. Short duration strategies offer a potential route to removing some of this uncertainty and reducing volatility.

Less uncertainty, dampen volatility and improve liquidity

For cautious investors willing to accept a degree of credit risk, short duration bonds offer the potential to deliver a more attractive income than cash or ‘safe-haven’ government bonds currently, while aiming to minimise interest rate risk and smooth volatility.

Bonds with shorter durations are less sensitive to changing interest rates and therefore usually less volatile in a changing rate environment. Furthermore, cash flows from frequently maturing bonds may provide better liquidity than longer-term bonds which offers the potential to be regularly re-invested at higher yields in the market.

An intermediate step

Of course, short duration strategies are not entirely risk-free but rather offer an intermediate step out of cash into riskier assets but with lower volatility than longer-duration credit. This potentially provides the opportunity for a more cautious route to seeking capital growth and higher income in more adventurous areas such as short-term high yield or emerging market corporate bonds.

AXA Investment Managers offers a range of short duration strategies which aims to meet your needs.

Related Articles

Fixed Income

European High Yield – Annual Perspectives

Fixed Income

The case for short duration investing

Fixed Income

Global Short Duration strategy - September 2023

Fixed Income

Discover more about fixed income investing

Explore now

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments .and the income from them can fluctuate and investors may not get back the amount originally invested.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.