This is a sponsored article from AXA Investment Managers.
Following Bank of England (BoE) governor Mark Carney’s declaration that the possibility of a rate hike has “definitely increased”, it appears as though interest rates across the globe are finally poised to rise, with major central banks – notably the Federal Reserve(Fed), European Central Bank (ECB) and BoE – preparing to lift rates and taper asset purchases.
One of the key risks of investing in fixed income is duration. The longer a bond’s duration, the greater its sensitivity to interest rates changes given that the bond’s capital can be eroded as rates rise. Accordingly, AXA Investment Managers (AXA IM), one of the leading asset management firms with expertise in short duration bonds, says that investors should be mindful of central banks’ tightening policies and should rotate to short duration bond funds in their search for yield and portfolio diversification.
Ride the rate hike wave
Investing in short duration bonds not only enables investors to reduce the sensitivity of their portfolios to rising interest rates, but also allows them to benefit from such an environment, in the sense that as bonds mature, the capital may be reinvested into higher yielding bonds, which potentially means higher income.
In addition, short duration bonds tend to provide investors with lower spread durations, which means that portfolios are relatively less sensitive to changes in spreads.
The re-emergence of volatility
In addition to the risk of interest rate normalisation, another concern is that volatility has rebounded somewhat amid rising uncertainties.
After reaching record lows earlier this year, the VIX Index jumped to reach 16.04 on 10 August 2017 amid geopolitical tensions and on growing concerns that US tax reforms will be delayed. Funds that may offer attractive risk-adjusted returns have increasingly found favour amongst investors aiming to mitigate the effects of any further increases in volatility.
Historical data during the past years shows that AXA IM’s emerging market (EM) short duration and Asian short duration strategies managed to achieve consistent returns while avoiding large drawdowns since being launched – even in 2015, when the ‘bund tantrum’ caused a spike in volatility.
Going forward, financial markets are likely to encounter headwinds in the form of geopolitical uncertainties, tightening measures by central banks and market corrections. However, considering that the fundamentals of EM and Asian markets have improved significantly over recent years, and taking into account the merits of short duration bonds, Asian and EM short duration strategies are likely to outperform the broader fixed income universe.
AXA IM is one of the market leaders in short duration fixed income strategies, managing over €25 billion* across ten short duration strategies since 2001.
Sources: AXA IM as at 31 July 2017
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This is a sponsored article from AXA Investment Managers.