Why IG short-dated credit?
It all comes down to quality. Compared to high-yield, lower-rated bonds, IG issuers tend to be larger, with stronger market positions, less debt, stable cash flows, and better access to funding. This makes them more resilient in the face of macroeconomic shocks. High-yield names, by contrast, are usually more cyclical, more indebted and exposed to sector-specific risks – as such, they can also be more prone to credit deterioration in more challenging economic environments.
Not so flat
A relatively flat US Treasury yield curve supports IG short-dated credit – especially compared to 2020–2021, before the US Federal Reserve’s last rate-hiking cycle. Today, investors can find attractive yields at the short end of the curve, making short-dated credit a compelling step out of cash option.
The low duration of short-dated credit means less interest rate risk in the event of rate-hiking environments. In contrast, during rate-cutting cycles like the current one, short-dated investment-grade credit, unlike cash, offers potential for capital gains as bond prices rise.
“Short-dated credit offers a lower-risk path to resilient yield and compelling income.”
History on our side
Short-dated credit has demonstrated strong consistency, with the ICE BofA 1-3 Year Global Corporate Index recording just one negative total return year in the past 28 (see Chart 1).
Chart 1: Global corporate short-dated index annual total returns returns (1997-2024)
This relative stability is largely due to IG credit resilience and short-dated credit’s lower sensitivity to interest rate fluctuations – making it a more predictable option in turbulent times.
How do we invest?
At Aberdeen, we start with a wide lens, leveraging our global research footprint and fixed income expertise. Our team of 140 specialists covers around 2,000 issuers worldwide. From this universe, we filter names that meet our short-dated strategy criteria, based on duration and credit rating
Many short-dated bond strategies focus solely on developed markets like the US and Europe. We don’t track a specific benchmark, which means we’re not anchored to developed markets. Instead, we seek the best ideas globally – wherever they may be, including high-quality issuers in well-rated emerging markets (EM) and across Asia. This approach not only enhances return potential but also helps reduce overall portfolio volatility.
Our focus includes government-owned entities such as utilities. We also favour companies with a domestic focus in fast-growing economies – businesses that are more insulated from external shocks like geopolitical tensions or tariff-related supply chain disruptions. A good example is Indian renewables – a sector driven by strong local demand and supportive policy tailwinds.
To further enhance yield, we selectively add:
- Lower rated (BBB) IG names
- Higher quality global high-yield names
- Sub financials (in mainly developed markets)
- EM and Asia names offering good yield pickup.
Agility is key. We actively monitor markets and adjust allocations as needed. When sectors are oversold, we may add names insulated from tariff risks. When valuations look stretched, we reduce risk and wait for better entry points.
The result: a portfolio with 1-2% volatility, an A-minus average rating, and a duration capped at two years.
Final thoughts…
We live in a turbulent world. For investors, IG short-dated credit offers a lower-risk path to resilient yield and compelling income. With an active, nimble approach, investors can enhance returns by tapping high-quality opportunities in EM and Asia. Selective exposure to lower-rated IG and short-dated high-yield bonds can further boost yield and diversification.
In a turbulent world, now could be the time to consider short-dated credit.