#ideas2invest

17 February 2022

Credit: Why 5Y duration is the sweet spot

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Story of the day

The Fed is slated to end quantitative easing in March and rate hikes will soon follow. Credit investors have been eager to shorten duration risk to reduce portfolio sensitivity, but historical data shows that this does not lead to optimal performance.

What does this mean for your portfolio?

Under periods of rising yields and growth, the 3-5Y bucket generated the highest average annual returns. Investors benefitted from the steeper curve roll-down effects, and were insulated from interest rate sensitivity in the long term. We believe that the current environment favours rising yields and growth momentum, and recommend that investors stay with the 5Y duration bucket.

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We like these:

Pimco GIS Diversified Income Fund

A global bond fund that has a broader universe relative to peers allowing it to serve as a one-stop, diversified credit solution. This fund invests into core Fixed Income sleeves: Global Investment Grade (IG); Global High Yield (HY); Emerging Market (EM) Bonds, allowing it the breadth to select the best opportunities in the market.

The fund targets higher returns relative to IG credit but lesser volatility than a pure HY strategy.

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