Hitting the yield sweet spot: Opportunities in short-duration credit

With the interest-rate cycle turning sharply, we explain why cash and fixed income investors may wish to consider the tactical and strategic attractions of short-duration credit.

The monetary landscape is being reshaped. Central banks are embarking upon what could be a prolonged phase of tighter monetary policy in response to surging inflation, as the global economy recovers from the COVID-19 pandemic.

With inflation running at a-near-40-year high in the US, a first of perhaps many rate hikes by the Federal Reserve is now pencilled in for March. In the UK, the Bank of England, also confronted by inflation numbers not seen in decades, is in full rate-rising mode. Meanwhile, in Europe, consumer inflation has now passed through five per cent, the highest level since the euro’s launch in 1999. The European Central Bank has recently shifted its stance from being “very unlikely” to raise rates this year to opening the door for a rate hike in 2022, with the market now pricing in a 15 basis points increase by the end of the year.

Set against this backdrop, there has been an increased focus on the current tactical opportunity provided by short-duration credit strategies. We recognise the tactical opportunity, but believe there is also a compelling argument for making a longer-term, strategic allocation to the asset class.

Download ‘Hitting the yield sweet spot’ to understand:

  • Why we believe the best risk/reward profiles are currently to be found in short-duration credit
  • How short-duration credit can offer fixed income investors with flexibility the scope for picking up yield while mitigating duration risk
  • Why potential attractive income traits and diversification benefits make the case for a strategic allocation to short-duration credit

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Key risks

Investment risk

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Credit risk

Bond values are affected by changes in interest rates and the bond issuer's creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default.

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