Short-dated UK government and corporate bonds have proved more resilient and shown lower volatility than broader fixed income markets during recent periods of bond market turbulence, says Aberdeen Investments.
The findings come as investors reassess the role of fixed income in portfolios against a backdrop of heightened macroeconomic uncertainty, shifting interest rate expectations and more pronounced volatility across global bond markets.
Aberdeen’s analysis shows that sterling-denominated UK corporate bonds and gilts with a maturity between one to three years have annualised volatility of around 2% and 1.9% respectively over the past three years, significantly lower than the 5.4% and 6.9% experienced by longer dated UK corporate bonds and gilts respectively.
Over the same time period, max drawdowns, which is the largest percentage drop in the value of an investment from its highest peak to its lowest trough, were around -1.3% for both short-dated UK corporate bonds and gilts, compared to -3.4% and -5% for longer dated corporate bonds and gilts.
Mark Munro, investment director, fixed income at Aberdeen Investments, said: “Short-dated credit is increasingly being used not just as a step out of cash, but as a core building block. It offers a balance between maintaining capital stability and generating income, which is particularly valuable in a more uncertain and volatile environment.
“The current environment has challenged some of the traditional assumptions around fixed income. Assets that were once seen as low risk, including parts of the Government bond market, have experienced more pronounced volatility.
“In that context, short-dated credit has stood out for its ability to combine income with relative stability, making it an increasingly important consideration when it comes to assessing the balance between risk and return.
“As interest rate expectations have shifted, we’ve seen greater volatility in longer-dated bonds, while short-dated credit has provided a more stable return profile. That combination of lower sensitivity to rates and still-attractive yields is increasingly appealing to investors.”
Aberdeen said that yields on short-dated bonds are still relatively high compared to recent years which makes them more attractive to investors. Starting from a higher yield means investors have more of a “buffer” if markets become volatile, helping to soften the impact of ups and downs in bond prices.
Aberdeen’s analysis also reflects a broader shift in how investors are thinking about liquidity. While cash and money market instruments have traditionally played a central role, declining yields and increased volatility in other defensive assets have prompted investors to look more closely at alternative sources of income and stability.
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