Short duration bonds represent one of “the best options” for corporates and investors looking to hold money in cash now, following a squeeze on yields, AXA Investment Managers’ Nicolas Trindade has said.
Yields have collapsed this year amid the coronavirus crisis and the sharp increase in government bond purchases by major central banks.
This means cash now yields barely above zero, and with rates unlikely to rise in the near-term amid the crisis, investors are seeing returns from cash vanish.
Trindade, who manages the AXA Sterling Credit Short Duration and Global Short Duration Bond funds, said investors need to look further up the risk spectrum now when it comes to their allocations to cash.
“Keeping cash can be loss-making when you account for inflation, so for investors using cash as a strategic asset, the next step up is short duration bonds,” he said.
“Short duration funds aim to offer higher yields, and our own sterling and global funds are yielding 1.3% and 2.2% respectively now, providing a real return even when accounting for inflation.”
Against a backdrop of soaring corporate issuance as businesses look to shore up balance sheets, Trindade said a cash management strategy was now needed to ensure negative returns were avoided.
“Companies have raised huge sums of cash, but they won’t want to see it eroded by inflation, merely becoming a loss-making asset on their balance sheets, so short duration bonds can help them avoid this,” he said.
Trindade added the prospect of more negative rates around the world was another reason for investors to look beyond cash, with already negatively yielding gilts out to six years.
“Cash already gives you nothing, and is loss-making when accounting for inflation, but we could see this worsen if we get negative rates,” he said.
“Markets will be volatile, and the natural reaction will be to go to cash, but investors don’t need to lock-in losses by holding that asset class. Short duration assets are naturally less sensitive to sell-offs and have the ability to recover quickly any drawdowns, so they provide an attractive alternative to cash.”
 According to the latest reading for CPIH inflation from the Office For National Statistics, CPIH was 0.5% in August 2020 https://www.ons.gov.uk/economy/inflationandpriceindices