Investment Memo

Started from the Bottom, Now We’re Here

Short duration fixed income, often thought of as the sleepiest corner of public markets, surged to the forefront of discussions in 2022. The dramatic rise in short term interest rates to offset the round of quantitative easing during the pandemic drove bond returns to their worst annual performance in modern markets. The result is that many institutional investors remain invested in money markets and cash alternatives, fearing that future rate increases could lead to more negative returns in bonds. While we recognize this strategy has worked up until now, we believe that cash alternatives and short duration play complementary roles in serving the liquidity needs of dynamic investment programs. This whitepaper makes the case that now may be an important inflection point, where modestly extending duration from cash alternatives to short duration bonds can offer several distinct advantages:

  • Higher return potential: short duration outperforms cash alternatives over the long term, particularly following large drawdowns.
  • Income cushion: due to the magnitude of rate increases during 2022, bonds now offer substantial cushion which can protect investors against future price declines.
  • Less reinvestment risk: money markets and other cash alternatives face reinvestment risk when rates fall, and it could make sense to lock in higher rates now.
  • Downside protection: with an economic downturn widely expected later this year, owning some duration could be beneficial.