SHORT MATURITY BONDS
- Short maturity high yield bonds (“HY”) experience similar default rates as longer-dated investment grade (“IG”) bonds such as single A-rated bonds.
- Compared to longer-dated IG bonds, short term HY bonds generate a higher coupon income.
- Due to their short term nature, short term bonds bear a low-interest duration risk.
- Short term HY bonds have a higher efficiency ratio in terms of risk-/return compared to long term HY bonds.
Short maturity bonds - low duration risk
Cumulative Default Rates of Global Corporate Bonds (in %)
Time horizon in years
Source: : Moody’s (average between 1981-2017)
Illustrative average return
vs. duration of major fixed income asset classes
Source: Bloomberg, BofAML indices, Swiss Bond Index (SBIDGT), Alpinum IM
Tapping the depth and breadth of the Credit Universe
The credit universe is deep and wide. Besides government and investment grade bond investments, many investors have started to tap the high yield bond (“HY”) market as the new “hunting ground” to compensate for the low (or even negative) yielding interest rate curve. As a consequence, the global HY market has substantially grown to more than USD 2 trillion in size over the last years. However, there exist many other credit markets, which differentiate in terms of risk (i.e. expected corporate default risk), liquidity, complexity and return expectations.