AXA IM: Looming rate hikes bring Asian short duration bonds into focus

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This is a sponsored article from AXA Investment Managers.

The age of record-low interest rates is reaching its end. As investors prepare for a series of rate hikes by the US Federal Reserve in the coming months, the need to plan ahead and build flexibility and diversification into portfolios has rarely been as pressing.

Incoming hikes, combined with unprecedented global political volatility, have seen a compelling new case for Asian short duration bonds emerge, according to long-time specialists AXA Investment Managers (AXA IM).

The Asian short duration bond market is underpinned by fundamental strength, relative value, diversification, and earnings visibility, according to Jim Veneau, AXA IM’s head of fixed income Asia and manager of the firm’s Asian Short Duration Bonds strategy.

“One of the benefits of short duration credit is reduced exposure to the business cycle and better cash flow visibility,” he explained, adding that the approach allows for higher conviction bets further along the credit curve to seek a higher yield.

And at a time when investments are increasingly vulnerable to external shock, Asian short duration bonds with a targeted final maturity of less than five years offer investors a number of significant advantages, according to AXA IM:

  • RESILIENCE TO RATE-RISE: They are less sensitive than full maturity bonds to interest rate movements
  • RISK-ADJUSTED EDGE: They tend to deliver better risk-adjusted returns than investing in a full maturity bond portfolio because they are less sensitive to rate and credit spread movements
  • EXPOSURE TO UPSIDE DOWNSIDE MITIGATION: The short duration approach focusing on high conviction credit while limiting high volatility long duration bonds may allow participate in the upside of a market but limit the downside
  • NATURAL LIQUIDITY: They have a natural positive liquidity because bonds are constantly maturing, allowing cash to be strategically reinvested at higher interest rates

The investment approach is particularly timely as rate rises in the US, UK, and Europe contrast with the limited volatility of the past year in markets such as China, India, and Indonesia, where central banks have injected liquidity to keep markets stable as middle classes expand exponentially.

“Overall, short duration bonds offer potential better risk-adjusted returns than a full maturity bond portfolio, particularly at a time when interest rates will rise,” Veneau said.

AXA IM has a 15-year history as one of the market leaders in short duration fixed income strategies and manages more than EUR 25 billion as of 31 July 2017.

Find out more about AXA IM short duration range

Sources: AXA IM as at November 2017

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This is a sponsored article from AXA Investment Managers.

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