Investing in short duration
Offer a first step onto the credit ladder with potentially less uncertainty.
Overview
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. Short-term bonds generally carry less uncertainty because the principal is repaid more quickly and can be reinvested earlier. However, duration is more than just term to maturity.
Maturity versus duration
Maturity is simply the number of years left until the bond’s principal is repaid. Duration takes maturity into account but also bond coupon rates and yield. When coupons are included, the bond's duration number (in years) will always be less than the maturity number. Generally, bonds with shorter maturities or higher coupons will have shorter durations.
What does duration indicate?
Duration is considered an indicator of one of the key risks in fixed income– interest rate risk. The calculation of duration essentially measures how sensitive the value of future cash flows is to changes in interest rates. The shorter a bond’s duration, the less the bond’s price will change when interest rates move, thus short duration bonds are less exposed to interest rate risk.
Why is duration useful?
Duration is a useful tool in helping to manage fixed income portfolio risk. First, it allows the portfolio manager to compare the risk sensitivity and potential price volatility of bonds with differing yields, prices, coupons and maturities. Furthermore, depending on the manager’s view on interest rates, they can adjust the average duration of the portfolio accordingly, moving shorter if a rate increase is expected (i.e. buying shorter dated bonds), or longer if a rate cut is expected.
With ongoing market volatility and strong fiscal concerns, short-duration strategies can provide a defensive positioning while still capturing attractive yields.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
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.