Market upheaval: time to consider short-dated bonds?
As market volatility persists, short-dated credit offers a compelling investment opportunity. Here’s why it might be worth considering.

Duration: 4 Mins
Date: 16 Oct 2025
In the US, the Federal Reserve (Fed) has resumed cutting rates (it cut three times at the end of last year), but uncertainty remains high. A recession is no longer a fringe scenario, and political pressure from the White House – combined with a lack of jobs data due to the government shutdown – makes the Fed’s job trickier. Nonetheless, we still think the Fed is likely to cut in October, with a further reduction in December.
In Europe, the more pressing question is whether the European Central Bank has finished easing or is instead pausing before delivering future cuts. Current economic forecasts seem broadly consistent with this easing cycle now being complete.
Tariffs, too, are back in focus. While peak uncertainty may have passed, the US continues to use them as a geopolitical tool. Trump’s latest China threat is case in point. The legal basis for many of these measures is now under Supreme Court review. Inflationary aftershocks from earlier tariff hikes are still expected to feed through, albeit more muted more than originally forecast.
Against this backdrop, investors are seeking resilience. And they’re finding it in short-dated bonds.
Flows into short-dated strategies have surged to record highs, with third-quarter cross-border sales hitting $7.6 billion – the highest on record. The appeal is clear: short-dated bonds offer attractive yields, lower interest rate sensitivity, and a degree of liquidity that’s hard to match in today’s market.
Let’s take a closer look.
Why short-dated bonds?
Long term, the consistency of returns is a major selling point for short-dated credit. Over the past 20 years, short-dated credit has delivered 17 separate calendar years of positive returns, with only three negative years. This compares favourably with the all-maturity index, which had 14 positive and six negative years. This relative stability is largely due to short-dated credit's lower sensitivity to interest rate fluctuations, making it a more predictable investment option, especially in turbulent markets.
Chart 1: Short-dated bonds: consistent returns
Short-dated credit also boasts a higher breakeven rate than the all-maturities index (see chart). The breakeven rate indicates how far yields can rise before the price loss from the index wipes out the annual yield. Due to its combination of attractive yield levels and low duration, short-dated credit can withstand larger increases in yields before returns are negated. This provides a buffer against interest rate volatility, reducing the risk of price unpredictability and enhancing liquidity.
Chart 2: Short-dated breakeven rates
Step out of cash option
Money market funds have been, and remain, popular due to their attractive yields and liquidity profile, especially over the last few years. These funds provide quick access to assets with a T+1 settlement period (trade day plus one day), which compares favourably with most short-dated EMEA-based (Europe, Middle East and Africa) credit funds with T+3 settlement times.
With the possibility that rates will come down at a slower pace than previously thought, money market fund yields have fallen and are expected to continue to do so. As such, we anticipate that investors will eventually move out of money market funds in search of more attractive yields, most likely in short-dated corporate bonds.
We believe that a genuine alternative to cash must offer cash-like liquidity. Our short-dated strategy provides T+1 settlement, matching money market funds, while also seeking to enhance yield. Investors therefore won’t sacrifice flexibility for potentially superior returns.
Enhancing yield through diversification
While investing in ultra-short duration credit can provide investors with a very low-risk profile, the real value comes from finding additional yield without significantly adding risk. We believe there are three ways to achieve this, and all three should be used in a balanced manner to ensure consistent outcomes.
Firstly, investors can go down the ratings scale and selectively add lower-rated investment-grade bonds and some high-yield short-dated bonds. Secondly, investors can look further down the capital structure to invest in subordinated bonds from both financial and non-financial entities.
Finally, investors can broaden their horizons by seeking the best ideas globally, including in Asian and emerging markets (EM). This approach can potentially create a more diversified, higher-yielding, and stable portfolio compared to passive indices. While concerns about a global trade war impacting EM nations are valid, these markets hold a significant comparative advantage in goods production. This dominance won't vanish overnight. Moreover, decoupling from China means rerouting goods through other EM countries, with China still maintaining its dominant industrial base.
Final thoughts…
Markets are likely to remain volatile for the foreseeable future. The tariff threat may have receded but could quickly change with the political winds. Central banks face the pressures of sticky inflation, softening job markets and weakening growth. The latter consideration seems to be winning out. For many central banks, including the Fed, further rate cuts are expected.
In today’s climate, we think investors should consider an allocation to short-dated credit. Active managers with a global mindset can continue to find assets offering a compelling yield and realised return over cash, with only a moderate increase in risk. A compelling proposition for investors seeking clarity in a volatile world.