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Why now for US Short Duration High Yield Bonds?

  • 14 September 2022 (5 min read)

Navigating today’s market

The inflationary pressures and a hawkish Fed have led to an increased probability of an US recession. With markets focused on the trajectory of interest rates and the impact of a US recession, short duration securities should be well-placed to help investors mitigate against this volatility.

By focusing on better-quality non-investment grade while diversifying the positions held and limiting duration risk, we believe our Short Duration High Yield strategy remains well positioned in this environment. The natural turnover of the strategy results in a high generation of cash, which allows us to constantly be reinvesting. During periods of rising rates, these reinvestments are into the new, higher yielding market. This, along with our duration management aims to insulate and dampen volatility within a rising rate environment.

Due to the substantial sell-off year-to-date, yields are among the highest we’ve seen since 2009, resulting in valuations that are very attractive and represent a buying opportunity. Looking forward, the default rate will likely increase from today’s exceptionally low level, especially if we are heading into a recessionary environment. However, we believe that the default rate within the US high yield bond market will not rise to levels that have been experienced ahead of previous recession. To the extent that default activity increases, we will continue to rely on our discipline credit process to avoid the defaults that do occur in the market.

Benefits of AXA IM’s US Short Duration High Yield strategy

1. Stable, consistent income

The strategy was created with the target to minimize volatility while generating stable, consistent income within the US high yield market.  Our short duration focus and discipline have allowed us to generate an attractive risk-return profile by compounding current income while avoiding principal losses. 

2. History of avoiding defaults

Our Short Duration High Yield strategy has always prioritised principal preservation and been managed with a strict credit discipline.  Any change in either our assessment of a security's potential or in the credit research outlook will prompt a reassessment of the position.  Since inception of the strategy in 2001, this conservative approach has resulted in only 2 defaults (2009 and 2011).1

3. Liquidity

Short duration securities make up the most liquid portion of the high yield market and are highly liquid, even in challenging markets. Our capacity and scale have allowed us to successfully manage through multiple bouts of market volatility.

4. Attractive valuations

While off its peak of earlier this year, the average weighted yield-to-worst in the strategy is 7.20%2 , and still offers an attractive entry point. The strategy’s volatility since inception is 4.01% compared to the index of 9.27%,3 so investors with a lower appetite for volatility could find a short-duration approach to high yield a very compelling proposition.

5. Defensive with a focus on quality

Our strategy has always been positioned as an up-in-quality, defensive portfolio versus the broad US high yield market and the benefit of our lower-risk positioning has clearly been evident during this recent period of volatility.

Our strategy’s long-term relative resilience during periods of volatility demonstrates the defensive qualities of our short-duration approach, as can be seen by the overall strategy’s modified duration-to-worst is 2.8, while the market duration is 4.5.4

6. Diversification

 The strategy remains well diversified and has 184 positions across 135 issuers in 16 of the 18 US high yield sectors5 . This diversification along with our Short Duration High Yield strategy’s bias for higher quality credits helps to mitigate against credit risk.

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Risk Warnings:

Counterparty Risk: Risk of bankruptcy, insolvency, or payment or delivery failure of any of the Sub-Fund's counterparties, leading to a payment or delivery default.

Liquidity Risk: risk of low liquidity level in certain market conditions that might lead the Sub-Fund to face difficulties valuing, purchasing or selling all/part of its assets and resulting in potential impact on its net asset value.

Credit Risk: Risk that issuers of debt securities held in the Sub-Fund may default on their obligations or have their credit rating downgraded, resulting in a decrease in the Net Asset Value

Important information

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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AXA US Short Duration High Yield strategy

The aim of the strategy is to generate income by investing in high yield debt securities (being sub-investment grade corporate bonds) while seeking to avoid the risk of default.

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    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.

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