Bond Rout Fuels Shift Into Short-Term Credit Funds in Europe

  • Shorter-dated funds attracted $2.8 billion since mid-March
  • Investors withdrew $1.8 billion from longer-term funds

Debt investors are shifting into shorter-dated credit funds in Europe as they seek to limit the risk of rising interest rates and bond price swings.

Funds that buy notes maturing within four years have attracted $2.8 billion since mid-March, while investors withdrew $1.8 billion from funds holding bonds due beyond six years, according to data from EPFR Global. TwentyFour Asset Management LLP will start a short-dated credit fund this summer to meet demand from clients, according to London-based portfolio manager Chris Bowie.

Investors are seeking refuge after long-dated bonds suffered the most in a sell-off that wiped more than $400 billion off the value of global fixed-income markets last month. They’d piled into debt with maturities as long as 50 years to maintain rates they were accustomed to as the European Central Bank’s quantitative easing drove prices higher and yields to unprecedented lows. 

“It makes sense to have short-dated credit,” said Juan Valencia, a credit strategist at Societe Generale SA in Paris. “It protects you from the time when yields and rates will inevitably start going back up again. Sovereign yields are very low, and if they fall too much lower, that could trigger a selloff again.”

Positive Flows

The yield on German 10-year bonds, Europe’s benchmark, was about 0.7 percent on Tuesday, down from a five-year average of 1.74 percent, according to data compiled by Bloomberg.

Corporate notes maturing in more than 10 years lost 5.7 percent in the rout from April 28 to May 14, while notes due within three years lost 0.1 percent, according to Bank of America Merrill Lynch index data.

Prices move more sharply relative to yields when maturities are longer and interest payments lower. Flows into short-term investment-grade bond funds were positive for 10 weeks through May 27, according to Bank of America Corp.

The TwentyFour Absolute Return Credit Fund will mostly invest in corporate bonds maturing within five years and have the option to buy long-dated credit, high-yield bonds or asset-backed securities to boost returns, Bowie said. The firm has 4.5 billion pounds ($6.9 billion) under management.

“The recent volatility has highlighted to investors that even in a world where you have quantitative easing, longer-dated bonds are far from risk free,” said Bowie. “We expect further price swings in government bond markets in the next few years.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE