Fast reading
- Bond yields have risen to such a level that the carry an investor receives in short duration debt should provide more than adequate compensation for any changes in bond prices.
- A global approach, trading in multiple currencies, can allow an element of arbitrage to capitalise on opportunities that may arise – between one country and another – to maximise the overall returns.
In the first quarter of 2024, nominal interest rates rose approximately 40bps1 which should, in theory, have had a negative impact on returns for credit investors.
However, yields have risen to such a level that the income earned – the difference between a bond’s yield and the cost to finance its purchase – that an investor receives in short duration debt should provide more than adequate compensation for any changes in rates, providing an extra premium and setting up the possibility of higher total returns going forward.
Figure 1: German sovereign yield curve
The Euro Kurzlaufer2 Strategy is primarily invested in euro-denominated short-duration credit (as well as dollar and sterling) in more than a dozen countries, across investment grade, sovereigns and corporates.
The European Central Bank, the US Federal Reserve and the Bank of England are all expected to cut benchmark rates this year and the easing path outlined by officials looks likely to further benefit short duration investments. As previously outlined, a short duration investor is likely to earn higher incremental extra income going forward, which more than compensates any change in rates.
The Strategy’s global approach creates a lot of breadth, allowing the team to respond and maximise returns based on the relative value of assets, whatever the direction of yields.
Arbitrage opportunities
This global approach, trading in multiple currencies, can also allow an element of arbitrage in terms of opportunities that may arise – between one country and another – to maximise the overall returns. Globally, monetary policies will always diverge to some degree, and over the short term this divergence is amplified.
Short term investments are also shielded from long-term uncertainties. In the event of short-term volatility – caused by geopolitical ructions or changes in monetary policy – then an investment in short duration credit can allow investors to navigate this volatility while at the same time potentially delivering a more attractive return than cash and other ‘safe haven’ options.
Short term investments are also shielded from long-term uncertainties
The Strategy’s global approach also allows the team to leverage so-called ‘home bias’. It’s well-documented that many investors are more comfortable with credit issued in their domestic currency – which can sometimes be more expensive on a relative basis.
An issue by a US bank, for example, may be cheaper to buy in euros rather than dollars. On the other hand, an issue by a French bank may be cheaper to buy in dollars rather than in euros, and then hedge back. The Strategy has access to a wide range of products from around the world and is able to track these nuances and arbitrage any differences to maximise overall returns.
For more information on Euro Kurzlaufer and Federated Hermes’ liquidity solutions please click here.
Share:
1 Source: Bloomberg as at 9 April
2 Euro Kurzlaufer is a global short duration credit Strategy (Kurzläufer means short-dated bond in German)
