The biggest misconception in the market right now is that short-duration is the safest place to be, said Lundie.
Aside from being “the most consensus trade” out there, going short-duration for the sake of it is not the sensible solution it was in the immediate aftermath of the financial crisis when the yield curve was flat and said coupons were yielding around 6%. Over the years, “markets got tighter and the curve has become steeper”.
By investing in short-duration bonds, “you’re not getting 6%; you’re not even getting 4%”, he said.
“In fact, if you were to do this properly, along the same lines as what you were doing in ’09, you’d get 1% for BB credit and above two-year risk in developed markets.”
Instead of telling clients to adjust their yield expectations with short-duration instruments, Lundie said the industry has tended to “fudge the rules”, such that the distinction between short duration and high yield has broken down.
“What used to be two years long is now five years long. And what used to almost investment grade is very heavily B. And what is B in five years is the high yield market.
“So basically, the high yield market has become the short duration market, and the short duration market has become the high yield market. They’re the same thing.”
Beyond that, the problem with buying bonds close to maturity is that they cannot go up in cash terms, which becomes an even larger issue if an investor is buying lower-rated credit, he stressed.
“You don’t buy equities that can’t go up, but people seem quite comfortable buying CCC bonds that physically cannot go up.”
