The short-term bond market offers the best opportunity in a decade

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Recent turmoil in fixed-income markets has created opportunities for investors after years of rock-bottom interest rates, experts said.

The UK government bond market suffered particularly badly in September, with tax cuts proposed by the “mini” budget spooked market participants, driving up gilt yields recording levels.

For new investors, these high yields and the resulting low prices make the market more attractive than it has been in decades, experts said.

Investors can now get a similar return on short-term UK gilts as they did on high-yield bonds a few months ago, said Nicolas Trindade, senior portfolio manager at AXA Investment Managers.

“The sharp price revision seen since the start of the year – and particularly since the ‘mini’ budget – has created the best buying opportunity for short-term UK bonds since 2008,” he said. .

Trindade manages the AXA Sterling Credit Short Duration Bond Fund, which currently yields 6.1% with an average credit rating of A- and a duration of 2.1 years.

“This yield is higher than that of the all-maturity Sterling Corporate universe, for only a third of its interest rate risk,” he explained.

The revaluation has also left spot bond prices well below par, giving investors an easy win as shorter duration bonds mature.

“As bonds mature at par, this pull-to-par effect should be a tremendous contributor to performance, especially as around 40% of our portfolio will mature over the next two years,” Trindade said.

Copia Capital launched a short-term bond portfolio to take advantage of this opportunity.

Copia Capital chief executive Robert Vaudry said the firm had already introduced a short-duration bond fund into several of its multi-asset portfolios, and advisers favored low risk and attractive returns.

“The feedback we were given was that if we could launch a pure mandate with the same low risk characteristics and attractive returns, their clients would find that attractive,” he added.

The fund is suitable for advisors whose clients seek returns in excess of cash, but who are conservative when investing in stocks.

Opportunities in a volatile environment

In the meantime, there are other potential opportunities in the fixed income market.

Managers at Ruffer Investment Company have turned to US inflation-linked and long-dated conventional bonds, as well as some long-dated UK indexed bonds.

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