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Global Short Duration strategy - May 2022

  • 13 July 2022 (5 min read)

Volatile month as inflation reaches new highs

  • Credit spreads continued to widen as inflation reached new highs in the eurozone and UK
  • Government bond yields were mixed, with US treasuries outperforming
  • We increased opportunistically our exposure to US high-yield

What’s happening?

Credit spreads widened in the first half of the month driven by concerns over central bank tightening, rampant inflation, and China’s zero-tolerance policy towards COVID-19. However, as the market dialed back expectations for interest rate rises in the US due to recession fears and China relaxed some of its COVID-19 restrictions, credit spreads tightened but still finished the month wider.

The US Federal Reserve (Fed) raised interest rates for a second consecutive time by 0.5% to the range of 0.75% to 1% in a bid to slow down inflation. Meanwhile the Bank of England raised interest rates for a fourth consecutive time from 0.75% to 1%, the highest in 13 years. Inflation rates in April reached a record high in the eurozone at 8.1% and a 40-year high in the UK at 9%.

German bund and UK gilt yields rose as the market focused on the impact of rising inflation on the future path of interest rates. Meanwhile, US treasury yields fell due to the prospect of potentially less aggressive hikes from the Fed as inflation slightly cooled to 8.3% in April from 8.5% in March and as recession fears increased.

Portfolio positioning and performance

Sovereign: Our exposure to sovereign bonds decreased by 2% to 12% as we sold some US treasuries to increase opportunistically our allocation to US high-yield towards the end of the month. We also switched out of nominal government debt into short-dated UK inflation-linked bonds at the beginning of the month as we remained invested in US and German inflation-linked bonds to profit from attractive inflation indexation over the next couple of months. We increased the duration of the portfolio to 2.7 years from 2.3 years to benefit from a higher level of carry.

Investment Grade: Our exposure to investment grade markets was broadly stable at 48% (versus 49% last month) as we were active in both primary and secondary markets across US dollar and sterling, with a bias towards the financial sector.

High Yield and Emerging Markets: Our exposure to high-yield and emerging markets increased by 4% to 39% as we added opportunistically to US high-yield towards the end of month following its sharp underperformance. We were also active in the euro high-yield primary market.


We expect market conditions to remain very volatile over the medium-term due to the combination of continued inflationary pressures, hawkish central banks and a protracted conflict in Ukraine. In such an environment, it is paramount to retain flexibility and manage actively the duration and credit exposure.

As inflation should start gradually falling over the coming quarters, we expect yields to stabilise at these higher levels since they already reflect a very aggressive pace of tightening by central banks, helping credit spreads to tighten.

No assurance can be given that the Global Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Global Short Duration strategy is subject to risks including credit risk, liquidity risk and interest rate risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets and global investment risks.

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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.

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AXA Global Short Duration Bond Strategy

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