Greater resilience at the short-dated end of the bond market could be the ‘new normal’ for investors, according to Aberdeen Investments.
Research carried out by the asset manager suggests lower timeframe bonds are holding up better than the long-dated end in terms of volatility amid ongoing market turbulence.
The current bond market environment is ‘challenging assumptions’ around fixed income and liquidity, Aberdeen said.
As a result, investors are reassessing the role of bonds in portfolios amid heightened macroeconomic uncertainty, shifting interest rate expectations, and greater volatility.
The firm’s analysis shows sterling-denominated UK corporate bonds and gilts with a maturity between one and three years have annualised volatility of around 2% and 1.9% respectively over the past three years.
This is significantly lower than the 5.4% and 6.9% for longer-dated UK corporate bonds and gilts respectively.
Over the same time period, max drawdowns from peak to trough were approximately -1.3% for both short-dated UK corporate bonds and gilts, versus -3.4% and -5% for longer dated corporate bonds and gilts.
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Mark Munro, manager of the Aberdeen Short Dated Enhanced Income fund, said: “Short-dated credit is increasingly being used not just as a step out of cash, but as a core building block. It offers a balance between maintaining capital stability and generating income, which is particularly valuable in a more uncertain and volatile environment.
“As markets continue to adjust to evolving macroeconomic conditions, managing risk and maintaining flexibility within fixed income portfolios could be important for investors.
“In this context, short-dated bonds might be well positioned to play an ongoing role in delivering more stable outcomes for investors,” he continued.
“The current environment has challenged some of the traditional assumptions around fixed income. Assets that were once seen as low risk, including parts of the government bond market, have experienced more pronounced volatility.”
