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.

AXA Sterling Credit Short Duration Bond Fund: Party not over for sterling short-dated bonds

  • 06 February 2023 (5 min read)

Key points: 

  • Sterling short-dated credit bonds are an attractive alternative to cash for investors seeking above-inflation returns
  • Yields remain elevated and valuations cheap compared to historical averages
  • Rising recession risk and a downward inflation trend could trigger a less hawkish tone from the Bank of England than anticipated.

After a brutal 2022, we believe that short-dated sterling credit could be looking at a year of excellent returns. In fairness, it’s a story that you’re likely to hear about a lot of asset classes right now, particularly in fixed income where valuations look attractive.

But sterling short-dated bonds find themselves in a very particular sweet spot. High yields provide an attractive jumping in point and the current economic climate could provide the impetus for above-inflation returns in 2023.

Bond market recovery offers opportunities

We believe that short-dated bonds are currently in a good position to outperform cash and provide above-inflation returns with a moderately higher risk profile, by benefitting from a strong ‘pull-to-par’ effect, high yields and attractive valuations.

The first month of 2023 has seen markets recovering from the shocks of the year gone by. Lower gilt yields and tighter credit spreads have helped short-dated sterling credit to perform well, with the AXA Sterling Credit Short Duration Bond Fund up by +2.2%1 in January (Z (G) GBP share class, net of fees).

The recovery has been good news for investors who added to allocations in the last months of the year, but we believe the recovery has some way to go. By historical standards, yields remain high, and valuations look attractive.


Source: AXA IM, Bloomberg as at 31/01/2023. 

The fall in bond prices has created a powerful ‘pull-to-par’ effect for bond investors. The average cash price of bonds held in our fund is 95.9, a level never seen since its inception in 2010. You would have to go back to the sub-prime crisis in 2008 on the short-dated sterling corporate index to see such a low level. As bonds mature at par (100), we believe that the capital appreciation of bonds could be one of the primary drivers for return in 2023. Furthermore, the income yield of the portfolio should gradually increase over the course of 2023 as we keep on participating in new issues offering very attractive coupons.


Source: AXA IM as at 31/01/2023. Fund average cash price is calculated using weighted average price of bonds in the fund excluding cash and derivatives. For illustrative purposes only. Past performance is not an indicator of future returns 

Moreover, UK investors are not rewarded for increasing the duration of their portfolios due to a very flat gilt yield curve. It is also interesting to see that the sterling credit curve is inverted, meaning that valuations are more attractive at the front-end of the curve.


Source: AXA IM, Bloomberg as at 31/01/2023

Economic backdrop supports positive outlook

We see a positive outlook for sterling short-dated credit. Inflationary pressures are widely expected to ease and stabilise in the UK over the year. If the UK tips into a recession later in the year, then the combined effect is likely to see the Bank of England row back on interest rates, providing an uplift for sterling short-dated credit, as the yield curve would ‘bull steepen’, meaning that short-dated yields would fall by more than longer-dated ones.

Active allocations to reflect our views

The AXA Sterling Credit Short Duration Bond Fund was resilient in 2022, outperforming its short-dated peers[1] and short-dated sterling corporate index by +2.2%2 and +3.8%3 respectively.

The outperformance was driven by our structurally conservative positioning and active management. Following the massive repricing in 2022, we gradually re-risked our portfolio to benefit from higher yields and wider credit spreads, switching our sovereign exposure into BBB-rated debt, and increasing the duration from 1.6yrs to 2.4yrs (the highest since its inception in 2010).

Considering the year ahead, we expect markets to remain volatile due to continued inflationary pressures, hawkish central banks and a high risk of recession in UK notably. Nevertheless, we remain optimistic over the medium-term and believe that despite the recent rally in January, there is still ample room to benefit from attractive levels of yields and valuations.

The AXA Sterling Credit Short Duration Bond Fund has a long-standing track record and has benefited from a constant and robust investment process since its inception in 2010. With a 5.1% yield and an average rating of A-, we believe that the fund represents a good alternative to cash for investors seeking above-inflation returns.

  • U291cmNlOiBBWEEgSU0gaW4gR0JQIGFzIGF0IDMxLzAxLzIwMjMuIFBhc3QgcGVyZm9ybWFuY2UgaXMgbm90IGFuIGluZGljYXRvciBvZiBmdXR1cmUgcmV0dXJucy4=
  • U291cmNlOiBNb3JuaW5nc3RhciBFQUEgRnVuZCBHQlAgQ29ycG9yYXRlIEJvbmQg4oCTIFNob3J0IFRlcm0=

Not for Retail distribution: This marketing communication is intended exclusively for Professional, Institutional or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

Long-term performance


Source: AXA IM as at 31/12/2022. Performance is presented net of ongoing charges (41 basis points) and gross of tax, and is calculated using mid prices for the Z (G) Acc share class (income reinvested) since its launch in November 2010. Past performance is not a guide to future performance and please note this is not an absolute return or cash plus strategy. *Cash is proxied by a composite of SONIA Compounded Index (SONCINDX) since 29/07/2021 and the ICE BofAML British Pound 3-Month Deposit Bid Rate Average Index (L5BP) from November 2010 to 29/07/2021. Return may increase or decrease as a result of currency fluctuations.

Cash deposits are guaranteed while all investments involve risks. Investments can go up or down and you may not get back the original amount invested. Past performance is not a reliable indicator of future results.

Additional risks associated with this fund include:

Counterparty Risk: failure by any counterparty to a transaction (e.g. derivatives) with the Fund to meet its obligations may adversely affect the value of the Fund. The Fund may receive assets from the counterparty to protect against any such adverse effect but there is a risk that the value of such assets at the time of the failure would be insufficient to cover the loss to the Fund.

Derivatives: derivatives can be more volatile than the underlying asset and may result in greater fluctuations to the Fund's value. In the case of derivatives not traded on an exchange they may be subject to additional counterparty and liquidity risk.

Interest Rate Risk: fluctuations in interest rates will change the value of bonds, impacting the value of the Fund. Generally, when interest rates rise, the value of the bonds fall and vice versa. The valuation of bonds will also change according to market perceptions of future movements in interest rates.

Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund manager may be forced to sell a number of such investments as a result of a large redemption of shares in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund's value and in extreme circumstances lead the Fund to be unable to meet its redemptions.

Credit Risk: the risk that an issuer of bonds will default on its obligations to pay income or repay capital, resulting in a decrease in Fund value. The value of a bond (and, subsequently, the Fund) is also affected by changes in market perceptions of the risk of future default. Investment grade issuers are regarded as less likely to default than issuers of high yield bonds.

Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.


Fixed Income

Short Duration Bonds

Offer a first step onto the credit ladder with less uncertainty

Find out more

Visit the fund centre

Fixed income
AXA Sterling Credit Short Duration Bond Fund

The aim of the Fund is to provide income combined with any capital growth.

View funds

Have our latest insights delivered straight to your inbox

Subscribe to updates.

Related Articles

Fixed Income

European High Yield – Annual Perspectives

  • by Yves Berger, Chris Ellis
  • 29 January 2024 (10 min read)
Fixed Income

The case for short duration investing

Fixed Income

Global Short Duration strategy - September 2023


    This marketing communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.

    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.

    Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.
    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available.  In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.
    For more information on sustainability-related aspects please visit https://www.axa-im.com/what-is-sfdr

    For investors located in the European Union :
    Please note that the management company reserves the right, at any time, to no longer market the product(s) mentioned in this communication in the European Union by filing a notification to its supervision authority, in accordance with European passport rules.
    In the event of dissatisfaction with AXA Investment Managers products or services, you have the right to make a complaint, either with the marketer or directly with the management company (more information on AXA IM complaints policy is available in English: https://www.axa-im.com/important-information/comments-and-complaints ). If you reside in one of the European Union countries, you also have the right to take legal or extra-judicial action at any time. The European online dispute resolution platform allows you to submit a complaint form (available at: https://ec.europa.eu/consumers/odr/main/index.cfm?event=main.home.chooseLanguage) and provides you with information on available means of redress (available at: https://ec.europa.eu/consumers/odr/main/?event=main.adr.show2).
    Summary of investor rights in English is available on AXA IM website https://www.axa-im.com/important-information/summary-investor-rights. Translations into other languages are available on local AXA IM entities’ websites.

    The AXA Sterling Credit Short Duration Bond Fund  is a sub-fund of AXA IM Fixed Income Investment Strategies which is a Luxembourg UCITS IV Fund (“fonds commun de placement”) approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg.

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are based. 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. Exchange-rate fluctuations may also affect the value of their investment.  Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.


    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. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.