Central-bank bond buying has made it relatively painless for credit investors to switch to short-maturity debt to avoid risks from rising interest rates.
Money managers at Amundi SA and Axa Investment Managers, which have combined holdings of $3 trillion, have been turning to a trade known as “curve positioning,” in which they switch out of long-dated debt and into similar notes with a shorter duration.
“We have quite good visibility on corporate fundamentals. The main uncertainty is in rates,” said Gregoire Pesques, head of the global credit team at Amundi, which oversees 1.7 trillion euros ($2 trillion). His team has been making the switch over the past two months, but says it “makes even more sense now.”
Flatter Curve
Investors give up less spread when shifting to shorter corporate bonds
Source: Bloomberg, BVAL
The trade is possible because the European Central Bank, which said it would “significantly” boost the pace of its emergency bond-buying program, has flattened corporate spread curves with its debt purchases. The spread between five- and 10-year euro debt is currently about 16 basis points, down from 28 basis points at the start of last year.
Nicolas Trindade, a portfolio manager at Axa Investment Managers, which oversees 858 billion euros, says the trade has increased the defensiveness of his portfolio without significantly denting returns.
Once they’ve shortened maturities, investors can boost spreads by taking different types of risk, such as buying subordinated notes or those on the cusp of junk. Though this potentially leaves them open to a market selloff or greater default risk, it has paid off this year, with high-yield notes posting returns of 1.16%, compared to minus 0.68% for their investment-grade peers.
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