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Fixed Income

Not All Short-Duration Strategies Are Created Equal

July 2018 - 15 min read

Looking to match the return of the broad bond market, with less risk? David Nagle, CFA, Head of Barings’ Multi Strategy Fixed Income Group, highlights a potential solution.

Today’s fixed income investors face a number of formidable challenges. Interest rates remain low by historical standards but appear poised to rise (or continue rising) amid a favorable economic backdrop and shifting global monetary policy. At the same time, credit spreads remain fairly tight across many fixed income sectors, meaning investors are often not being adequately rewarded for taking on credit risk.

This environment has left many investors strapped for yield and return, potentially forcing them to step outside their normal risk tolerance to pursue their investment objectives. For example, some investors may have either gone down in credit quality or reached for yield at the longer end of the yield curve, which is more sensitive to interest rate movements. In so doing, investors may be exposed to significantly more credit or duration risk than they realize (in other words, more vulnerable to market volatility and possible capital depreciation going forward).

An appropriate strategic allocation to a high-quality short-duration bond strategy may allow these investors to reenter their comfort zone—not only today, but for the long term as well.

A Vast Universe of Short-Duration Strategies
Many investors mistakenly think of the short-duration bond universe as a monolithic group of strategies that all share one key characteristic—the ability to help protect against rising rates or, more generally, to help reduce portfolio volatility.

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