As rates rise across the world, investors in corporate bonds have begun to consider a low-duration approach. What could this mean?
Inflation is a massive issue globally at the moment. Central banks are coming to terms with inflation, geopolitical unrest, and a risk of recession. Amidst all of this, investors are trying to navigate these rising rates with corporate credit.
With these unprecedented tensions, inflation, and potential recessions, monetary policy is understandably changing. For this reason, investors seeking credit exposure have begun to consider a low-duration approach which might just be an appealing solution for them. We’ll dive into what this is and why it could be a potential option.
What could be the potential benefit of a short-dated corporate bond?
Short-dated corporate bonds do have their benefits, they can actually reduce their interest rate sensitivity. They also have the potential to outperform various other investments, especially as rising interest rates spur market volatility.
Short-dated bonds have, as you may have already noticed, posted higher ratios than long-dated corporate bonds. Not to mention, as a result of the higher yield per unit, short-dated corporate bonds can definitely reverse any losses that may have been prompted by rising rates.
The consequences that a rising rate environment may have on credit investors
Believe it or not, it isn’t a negative. Yields have increased and bonds are looking a lot more attractive to investors and companies alike.
Investors are, however, beginning to focus more on recession risk, mainly because of the cost of living crisis. In the past, they would have been more focused on growth. Short-duration corporate bonds, for this reason, are becoming more attractive to investors too. In a time when investors are concerned about market volatility, they can provide an investment with little risk.
Are there risks that come with short-duration corporate bonds?
It’s not all good news, though. Investors need to always remember that, like with any investment, it isn’t completely risk-free. Every corporate bond has a credit or default risk, and short-duration corporate bonds are no different. However, it has to be mentioned that they do have a lower default risk.
Although short-dated, these bonds can also result in potential losses. This is a risk that every investment comes with, and most will be aware of this, anyway. These risks can be deterred with intensive credit research – perhaps using experts and specialists can help in this regard.
As a side note, you should have an in-depth process in place specifically for investing in these short-dated corporate bonds.
Can this enhance yields?
A low-duration strategy does come with a compromise. While the yields come with less risk, they have a lower yield compared to the broader market.
Again, an extensive strategy could help to heighten this yield. In fact, with the right strategy, you can actually have a yield that could be similar to a full-maturity credit, with the added benefit of a lower duration.
This highlights the need for certain experts around you that are trained in creating the most successful strategy.
Should you put short-term bonds in your portfolio?
It’s worth putting these short-term bonds into your portfolio just to diversify your exposure, all while seeking out better yields. We suggest that you do put them in your portfolio. It’s a worthwhile strategy. Ultimately, this is your choice – if you think it will bring your portfolio down, avoid doing so.
Many investors move their short-term bonds to credit, too.
How can you navigate this rising-rate environment?
As we have mentioned throughout, we suggest that you get an expert or accountant/financial advisor to help you with this kind of investment. This is especially true if you are not used to short-term bonds.
The best short-term bond investments are completed with a stringent management approach. This will navigate the rising rate environment and likely outperform other investments. It just has to be performed correctly.
We would also recommend keeping your eye on interest rates and the forecast for interest rates. Ultimately, many aspects of the financial world are heavily debated right now. One thing is for sure, though, is that policymakers are much more concerned about the direction of inflation more than anything else, this is a direct response to the Covid pandemic.
What does this mean? It does look like global monetary policy has never returned to its normal state, which does mean that there will be rising interest rates.
We hope this quick guide helps you to navigate the rising rates in corporate credit. Management is key for investors that are trying to circumnavigate this uncertain world of finance at the moment. Ultimately, we could see a significant difference in returns.