Industry Voice: Aligning financial and climate obligations within fixed income portfolios

An innovative framework for identifying climate-transition risks and managing climate change in fixed income portfolios

clock • 1 min read
Industry Voice: Aligning financial and climate obligations within fixed income portfolios

Regulatory, societal and investment pressures are driving greater awareness of climate-related risks. At the same time investors face many challenges, including a backdrop of negative real returns on cash which demand they consider alternative investment solutions.

In this article we discuss why short-dated corporate bonds which are relatively close to maturity can help investors capture attractive yields with minimal interest-rate sensitivity, low portfolio volatility and good levels of liquidity - all while having a relatively low climate-related risk. 

The appeal of short-dated investment grade bonds

The unique characteristics of short-dated bonds offer investors an opportunity to access a lower volatility segment of the broader investment-grade fixed income market. Short-dated investment grade bonds can be attractive to a diverse range of clients, including pension schemes undergoing de-risking or local authority treasurers seeking enhanced returns above cash which can help mitigate the effects of Inflation.

Short-dated investment grade bonds can offer attractive and relatively consistent returns against a market backdrop of negative real returns. The diagram below highlights that risk free returns are negligible but you can enhance your yield by taking modest risk through investing in short dated corporate bonds.

It is possible to obtain good relative returns by investing in short-dated bonds from good quality investment grade companies without taking on additional interest rate (duration) risk. The diagram also highlights two such examples - a large European financial institution (Euroclear) and an Auto manufacturer (VW) - both of which offer attractive yields for low levels of interest rate risk and with good credit profiles.

 

 

This post is funded by Aegon Asset Management

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