Disclaimer: Views in this blog do not promote, and are not directly connected to any L&G product or service. Views are from a range of L&G investment professionals, may be specific to an author’s particular investment region or desk, and do not necessarily reflect the views of L&G. For investment professionals only.
For years, duration has been seen as the primary hedging tool for credit risk. But we believe investors should re-assess the role it plays in bond portfolios. In today’s world, duration can no longer be something to ‘buy and hold’ and should be actively managed.
Duration can be a powerful hedging tool in times of broader credit market distress.
However, it can also be a considerable source of risk for credit portfolios and can cause issues for unconstrained bond strategies that seek to smooth out long-term investment returns.
Our latest whitepaper highlights why a dynamic approach to duration management
matters, focusing on these key points:
• Recent market dynamics, especially the return of inflation in 2021, have
undermined duration’s effectiveness as a hedge for credit risk, with correlation
patterns between credit spreads and government bond yields shifting. We want
to own duration when it is likely to act as a good hedge for the credit risk we
own.
• Shifting correlations make static duration management in bond portfolios
unattractive, particularly when the expected return of duration is low.
• L&G’s unconstrained bond strategies adopt a dynamic and flexible approach to
managing duration. We reduce duration when we believe investors' inflation
fears are likely to dominate their recession fear and returns from duration are
likely to be positively correlated with returns from credit.
Read the whitepaper to find out more.
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