Key takeaways

  • 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

Short maturity bonds - low duration risk

Bonds with a short maturity bear a low duration risk, given the fact that they pay back the principal in a short time frame and the capital can be re-invested at potentially higher interest rates. However, even more important is another beneficial feature of short term bonds: Corporate bonds with a short maturity tend to suffer a much lower default rate, which is true for both investment grade (“IG”) and high yield bonds (“HY”). The table below of Moody’s cumulative default rates for corporate bonds well illustrate this observation.
Cumulative Default Rates of Global Corporate Bonds (in %)
Time horizon in years
Cumulative Default Rates Short Term Maturity Bonds

Source: : Moody’s (average between 1981-2017)

Illustrative average return
vs. duration of major fixed income asset classes

As the statistics above demonstrate, short term high yield bonds suffered a similar default rate as it is the case for longer dated investment grade bonds such as single A-rated bonds. This is very good news for investors as short term HY bonds bear a higher coupon compared to longer term IG bonds. The analysis also shows that short term HY bonds have a much higher efficiency ratio in terms of risk-/return compared to long term HY bonds. The graph below illustrates the risk-/return relationship of a variety of bond sub-asset classes, whereas the efficiency ratio of global short term HY bonds receives the highest score.
illustrative average return Short Term Maturity Bonds Alpinum

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. 

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