Worried about rising interest rates? Keep your duration short

Short duration bonds could remain a viable option for risk-averse investors in today’s environment as this asset class is observed to be less sensitive to fluctuations in interest rates

From soaring inflation to a tightening in central bank policies and rising recession fears, investors in Singapore and abroad are facing a myriad of challenges that are suppressing financial markets' performance and investment returns.

The sell-off in the global bond market has been particularly acute this year as the U.S. Federal Reserve and other central banks around the world raise interest rates in a bid to fight inflation.

While rising interest rates typically hit bond prices, not all is lost for investors searching for resiliency in the fixed income market. In the current environment, one often overlooked segment that offers some degree of resiliency is short duration bonds.

Duration, measured in months or years, gives an indication of the time it takes for investors to be repaid the bond's price given its underlying cash flow position. Calculation of duration takes into account the bond's maturity, or time left until the principal is repaid, its coupon rates, and its yield. The measurement works on assumption that the issuers of bonds do not default in paying coupons and/or repaying principal while considering the other factors above.

For investors, duration is a useful guide of interest rate risk. Generally, the longer a bond's duration, the more susceptible its price may drop as interest rates rise. Conversely, when interest rates decline, longer duration bonds may experience bigger price increase susceptibilities compared with shorter duration ones.

As interest rates would be likely to continue rising in the coming months, it could be a case for investors to consider adding short duration bonds to their portfolios. One way of doing so is investing in ultra-short (less than a year) or short (one to three years) duration bond funds.

Generally, ultra-short and short duration bond funds are made up of fixed income instruments that have a shorter time to maturity.

New bonds added into the portfolios upon the expiry of old ones could come with higher yields as interest rates continue to climb.

In conclusion, short duration bonds could offer investors some degree of resiliency in view of the volatility of the current market environment.

"In the face of rising rates and the current high inflationary environment, short duration bond strategy could offer investors a viable defensive option," says HSBC Asset Management Singapore's Head of Wholesale Business, Southeast Asia Dennis Ng.

The HSBC GIF - Ultra Short Duration Bond, HSBC GIF - Global Short Duration Bond and HSBC GIF - Global Short Duration High Yield Bond Sub-funds are all registered as recognised schemes in Singapore.

For more information on HSBC Asset Management's short duration bond funds, visit the HSBC Short Duration Bond Fund Solutions website.

Important Information:

This document is for information only and is not an advertisement, investment recommendation, research, or advice. This document has not been reviewed by the Monetary Authority of Singapore. Any views and opinions expressed are subject to change without notice. It does not have regard to the specific investment objectives, financial situation, or needs of any specific person. You should seek advice from a financial adviser. Investment involves risk. Past performance of the managers and the funds, and any forecasts on the economy, stock or bond market, or economic trends that are targeted by the funds, are not indicative of future performance. The value of the units of the funds and income accruing to them, if any, may fall or rise and investor may not get back the original sum invested. Changes in rates of currency exchange may affect significantly the value of the investment. HSBC Global Asset Management (Singapore) Limited ("AMSG") has based this document on information obtained from sources it reasonably believes to be reliable. However, AMSG does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.

HSBC Global Asset Management (Singapore) Limited
10 Marina Boulevard, Marina Bay Financial Centre, Tower 2, #48-01, Singapore 018983
Telephone: (65) 6658 2900 Facsimile: (65) 6225 4324
Company Registration No. 198602036R

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to