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Why buy short-dated bonds?

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ARTICLE TYPE

BondTalk

TOPIC

Rates

PUBLISHED

February 03,2022

READ TIME

2 mins

AUTHOR

Mark Benbow

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ARTICLE TYPE BondTalk

TOPIC Rates

PUBLISHED February 03,2022

READ TIME 2 mins read

AUTHOR Mark Benbow

Markets have started the year on the back foot. Asset prices have reacted negatively to central banks beginning to step away from monetary support and economies requiring higher interest rates. Indeed, it’s evident that a higher cost of capital is bad for equity prices, but this is not necessarily the case for bond prices.

Both equity and debt investors focus on cashflows - equity investors value businesses on the present value of future cashflows, but debt investors look at interest coverage.

Below is the year-to-date returns of Netflix across both its debt and equity. As you can see, the equity is down 25%, but this particular line of short dated bonds are unchanged. Why is that? Put simply, fundamentals are strong and bondholders only care about getting their money back. Interest rates are rising, but Netflix can still afford to service its debt.

In short, this is the beauty of short dated paper. You clip attractive coupons and experience low amounts of volatility compared to equities. For investors seeking to preserve cash while still generating a return, short dated bonds are a nice potential solution for that problem.

_{Source: Bloomberg}

Note; we hold Netflix bonds in our portfolios.

More about the authors

Mark Benbow Portfolio Manager

Mark Benbow, portfolio manager, is a member of the global leveraged finance team. He specialises in high yield bonds and co-manages our global high yield strategies.

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