How a short-term view may improve long term prospects

Indices: ICE BofA 1-5 year global inflation-linked government index, ICE BofA Global Government Index, ICE BofA US Corporate index, ICE BofA Euro Corporate index, ICE BofA US High Yield Index, ICE BofA Euro High Yield Index

At the moment, while it is unclear how many of the policies Trump will implement in full, we expect to see some tariff increases, restricted migrant flows and moves towards a fiscal easing package during 2025.  This could result in both supply shocks and a demand boost, both of which would be inflationary. Short duration inflation-linked bonds could provide an effective hedge against inflation, low exposure to interest rate volatility, and a low correlation to other fixed income assets.

Another way to consider diversification is through broadening regional exposure. For example, shorter-term Asian USD bonds currently offer relatively higher spreads than similar-maturity US peers and a broader country risk diversification. The diversity of Asian businesses and economies should give investors exposure to credits that are less prone to US trade policies. Economies such as India are also much more domestically orientated sheltering the issuers from geopolitical volatility.

Dynamic allocation

In periods of uncertainty and greater volatility, moving dynamically across regions, sectors and asset classes may help provide investors with opportunities. For 2025, with Trump’s presidency expected create potential headwinds beyond the US, the continuing geopolitical challenges across the Middle East and Ukraine, and expected divergence in central bank’s monetary policies, many investors may look to a flexible approach as it provides the potential to exploit opportunities available in the global short-dated fixed income universe via active asset class and sector allocation as well as active management of duration across currencies.

Short duration offers portfolio managers a cheap and easy way to refresh portfolio holdings through the natural liquidity pipeline from bonds maturing. This ability should therefore help them take advantage of different market environments. It could be particularly relevant when there are dislocations between government and investment grade or high yield and emerging markets, as well as when there are opportunities to move across the short end of the curve. 

For those investors seeking the flexibility to adapt to changing market conditions throughout the cycle, a global approach to short duration may be one option as it offers access to the broad short-dated universe in order to exploit opportunities.

Responsible Focus

Investors targeting net zero objectives can also do this through short duration strategies without compromising on returns. When reflecting responsible investing in a portfolio, there are two main approaches to consider:

1. Carbon transition strategies. These strategies focus on seeking opportunities associated with the transition to a low-carbon economy and gradually reducing exposure to carbon emissions.  For investors, it offers a means to reflect concrete action within an investment portfolio that supports the transition to a lower carbon economy.
2. Green bonds. Green bonds finance projects that are focused on a positive environmental impact and that ultimately contribute to the transition to a low carbon economy. These projects can be quite broad but the majority sit within one or more of these environmental themes: green buildings, sustainable ecosystems, low carbon transport and smart energy solutions.

The growth of the green bond universe means that it has moved from being considered a niche investment to a part of a global aggregate portfolio. This increased diversity means investors have different routes to access this asset class including through short duration bonds.

Both of these approaches can be accessed through short duration strategies.

Many short duration outcomes

While riskier than cash, the potentially higher returns on offer, limited drawdowns and natural liquidity of short-dated bonds, we believe, make them an attractive consideration for an investor’s portfolio.

At AXA IM, we have managed short duration strategies for 25 years and have a wide range of short duration strategies. We believe we are, therefore, well placed to discuss how short duration can offer investors different outcomes depending on what they are looking for.

So, whether the outcome is diversification, responsible investing, growth or being able to take a flexible approach, short duration may offer a path to that outcome.