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Fixed income of short duration and high quality: how long have you not seen such a convincing opportunity?



  • The shape of the yield curve of corporate bonds with investment grade has changed drastically since the beginning of monetary normalization
  • The compensation received when investing in bonds with a two-year maturity of investment grade is significantly higher than the compensation of investing in 10-year bonds.
  • The change in balance points has been more dramatic in bonds with a two-year maturity

In the last 10 years, there has not been an investment opportunity as attractive as the one that shows the high quality and short maturity US fixed income. According to Alex Mackey , fixed income manager at MFS Investment Management , the shape of the yield curve of investment grade corporate bonds has changed drastically since the beginning of monetary normalization.

"We have seen an acceleration in the flattening of the yield curve of corporate bonds after the Fed committed and began its cycle of rate hikes, which began in December 2015. Today, the compensation received when investing in bonds with a two-year maturity investment grade is significantly higher than the compensation of investing in 10-year bonds. The investor who is considering leaving this maturity spectrum is receiving a performance substantially lower than that received a decade ago. With the flattening of the yield curve, the short part has risen more than the long part of the curve ", explains the manager.

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For his part, Phil Burgener , also fixed income manager in MFS Investment Management , argues that there are a couple of dynamics that are affecting the curve. "On the one hand, the Federal ReserveThe short-term rates began to rise at the end of 2015, and this has impacted the short part of the yield curve of the Treasury bonds. Therefore, we have seen a shift in Treasury interest rates, with the federal funds rate reaching levels of between 150 and 175 points, this has affected the part of the curve with a maturity of two years and has shifted towards above. But, in addition to this dynamic, we have also seen that spreads of corporate debt have also flattened. So the incremental income earned from investing in 10-year corporate bonds versus 2-year bonds has also dropped significantly. "

According to Mackey, what really happened was a flattening of the Treasury curve, which led to a flattening in the corporate curve. "If the differential environment is taken into account, in aggregate form, the investment-grade corporate debt is at historically compressed levels. So the curve of interest has flattened considerably and the differential of the curve itself is at relatively low levels. "

In the opinion of Burgener, it is very likely that the Fed will continue raising rates to continue with the line of monetary policy and its historical norms. "It's not a question of knowing if rates will continue to rise, it's a question of how many more rate hikes we're going to see," he says.

"In an environment like this, an investor should bear in mind that if he invests in bonds with lower maturity, these will generally be less sensitive to movements in interest rates than long-term fixed-income investments. . If we examine the equilibrium point or the margin cushion that bond yields have to withstand higher interest rates, the part of the two-year bond curve shows the highest equilibrium points that have been seen in the last five years. An investment case that looks very convincing. While, if you examine the spectrum of debt with greater maturity, to five or ten years, you can see that the balance points are much lower.

The change in balance points has been more dramatic in bonds with a maturity of two years, these being the points at which yields would have to rise before hypothetically an investor begins to lose money. "That type of performance is being seen more in the short part of the curve, with higher points of balance. Active management is therefore critical in the current credit market, as investors should consider optimizing performance in an environment with more restrictive monetary conditions, changing the credit and the yield curve for an increase in volatility as a whole. " , concludes Brad Rutan , product specialist at MFS Investment Management.The change in balance points has been more dramatic in bonds with a maturity of two years, these being the points at which yields would have to rise before hypothetically an investor begins to lose money. "That type of performance is being seen more in the short part of the curve, with higher points of balance. Active management is therefore critical in the current credit market, as investors should consider optimizing performance in an environment with more restrictive monetary conditions, changing the credit and the yield curve for an increase in volatility as a whole. " , concludes Brad Rutan , product specialist at MFS Investment Management.


SUBMITTED BY Funds Society

Source: http://www.fundssociety.com/es/noticias/mercados/