Fixed Income  

Short-dated bond market offering best opportunity in a decade

Short-dated bond market offering best opportunity in a decade

Recent turmoil in fixed income markets has thrown up opportunities for investors after years of ultra-low interest rates, experts have said.

Since the start of the year, the price of government and corporate bonds has crashed, as rising interest rates have meant investors are able to gain similar returns from less risky assets.

This led to huge outflows from fixed income strategies, with more than £5.7bn withdrawn from UK bond funds in February and March this year, according to the Investment Association.

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The UK government bond market in particular suffered in September as the tax cuts offered by the "mini" Budget spooked market participants, driving gilt yields up to record levels.

For new investors, these high yields and correspondingly low prices are making the market more attractive than it has been in decades, experts have said.

Investors can now get a similar yield in short dated UK gilts than they would have got in high yield bonds a few months ago, said Nicolas Trindade, a senior portfolio manager at AXA Investment Managers.

“The large repricing experienced since the beginning of the year - and particularly since the 'mini' Budget - has created the best buying opportunity in UK short-dated bonds since 2008,” he said.

Trindade manages the AXA Sterling Credit Short Duration Bond Fund, which is currently yielding 6.1 per cent for an average credit rating of A- and duration of 2.1 years.

"This yield is higher than the one of the all-maturity Sterling Corporate universe, for only a third of its interest rate risk," he explained.

The repricing has also left the cash prices of bonds significantly below par, which gives investors an easy win as short-duration bonds reach maturity.

“As bonds mature at par, this ‘pull-to-par’ effect should be a tremendous contributor to performance, particularly since around 40 per cent of our portfolio will mature over the next two years,” Trindade said.

Copia Capital has launched a short-duration bond portfolio to take advantage of this opportunity.

Managing director of Copia Capital, Robert Vaudry, said the company had already been introducing a short-duration bond fund into several of its multi-asset portfolios, and advisers were keen on the low risk and attractive yields.

“The feedback to us was that, if we could launch a pure mandate possessing the same low risk characteristics and attractive yields, their clients would find this appealing,” he added.

The fund is aimed at advisers with clients who want returns that are higher than cash, but who are cautious about investing in equities.

Opportunities amid volatility

Meanwhile, there are other potential opportunities in the fixed income market.

The managers of the Ruffer Investment Company have moved into long-dated US inflation-linked and conventional bonds, as well as some long-dated UK index-linked bonds.