The opportunity in UK short-dated bonds is the best it has been for more than a decade, with yields back to 2009 levels in most markets, according to Nicolas Trindade, senior portfolio manager at AXA Investment Managers.
Nicolas Trindade, manager of the £542 million[1] AXA Sterling Credit Short Duration Bond Fund, says that as gilt yields have risen and credit spreads have widened amid elevated inflation, recession fears and political and economic turmoil, UK short-dated bonds have repriced to levels not seen for more than 10 years – presenting a compelling entry point to the asset class.
“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,”
“Investors today can get the kind of yield they would have got a couple of months ago from high yield bonds, which have much lower credit quality. For instance, our fund’s yield is now close to 6.1% 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.”
Trindade – who is favouring financials in the current environment – also points out that the repricing has left the cash prices of many bonds significantly below par (100p), giving natural upside as bonds mature.
“The average cash price of the bonds we hold is currently around 93p,” he says. “As bonds mature at par, this ‘pull-to-par’ effect should be a tremendous contributor to performance, particularly since around 40% of our portfolio will mature over the next two years. An all-maturity bond fund will simply not enjoy this pull-to-par boost to the same extent.”
More broadly, Trindade expects volatility to remain a feature of markets, although he argues the outlook, given the repricing that has occurred and the relatively low risk of default in UK short-dated bonds, remains promising.
“We expect market conditions to remain very volatile over the short-term due to continued inflationary pressures, hawkish central banks, and a high risk of a global recession,” he says. “Nevertheless, we remain optimistic over the medium-term and believe the performance outlook is the most positive than it has been for many years.”
