Nicolas Trindade, who works on the AXA Sterling Credit Short Duration Bond fund, explained that because of these factors, such vehicles could provide an attractive alternative to holding cash.
“Buying a corporate bond with a lower maturity provides investors with not only a lower duration but also a lower spread duration. This means that the bond will exhibit a lower sensitivity to changes in government bond yields as well as credit spreads,” he explained.
“A short-duration bond fund could also be attractive for cautious investors who are currently investing in cash, but are dissatisfied with the inherent low level of returns.”
A number of those buying funds have also advocated short-duration plays.
“Bond yields are trading at extreme lows, and it makes sense to look to reduce duration in a multi-asset portfolio. You can do so by selecting a manager that is flexible in their attitude to duration, or buy a dedicated short-duration fund,” said Mark Preskett, a portfolio manager at Morningstar.
However investors have been warned not to assume that going short duration is without its drawbacks. Mr Preskett noted that investors could use this approach to dampen interest rate risk, but this would involve sacrificing some forms of yield as a result.
Gill Hutchison, of research provider The Adviser Centre, cautioned that short duration did not guarantee a risk-free return.
“These types of funds are proving attractive to cautious investors, who are seeking a yield that is greater than that available on cash,” she said.
“Such investors should also understand that while short-dated bonds are relatively low risk in nature, they still incorporate credit and interest rate risk and so should not be treated as a pure cash alternative.”
Global view
Duration, for now, appears to be a key risk for bond investors in developed economies, with many preferring to opt instead for credit risk – betting against the chance a company may default and prove unable to repay its debt.
But in other parts of the world the situation looks radically different, with inflation appearing to be on the retreat.
According to Ashmore, an emerging markets specialist, inflation has been tumbling down in three of the region’s most important countries: Russia, India and Brazil.
Russian CPI inflation fell to 4.1 per cent in April, down from 4.3 per cent in March, while in India the same metric dropped to 2.99 per cent in March versus an expected 3.3 per cent. Brazil saw a sharp fall in its own measure of price increases.
