Short Duration: Why now?

2 minute read

Key takeaways:

  • Treasury rate curve flattening presents an opportunity within short duration.
  • A short duration strategy can benefit from the pick-up in rates while not "locking in" investments for a long time horizon.
  • Higher short duration rates may allow investors to dial back equity risk through a re-allocation to short duration fixed income.

 

With the focus in recent weeks on the 10-year Treasury rate reaching 3%, investors may have lost sight of the continued steady increase in short-term rates, evidenced in the chart below by the 2-year Treasury constant maturity rate. As of April 26, 2018, the 2-year Treasury rate held at 2.49%, a level not seen consistently since August 2008.

2-year and 10-year constant maturity Treasury rates


Source: Board of Governors of the Federal Reserve System (US), retrieved from FRED, Federal Reserve Bank of St. Louis, 8/1/2008 – 4/26/2018.

The rate increase on the short end of the curve indicates the market is now pricing in expected future FOMC rate hikes, compressing the yield differential between 2-year and 10-year Treasury rates. This compression increases the relative attractiveness of investing at the short end of the curve.

Investors wanting to benefit from this curve flattening may want to consider an allocation to a short duration fixed income investment strategy. A short duration strategy positions investors to take advantage of the pick-up in rates while not "locking in" investments for a long time horizon. Additionally, short duration strategies that invest in a range of fixed income sectors, including investment grade corporate bonds, structured credit, and opportunistic allocations to high yield corporates and emerging markets, give investors exposures to relatively short, diversified credits that may have less downside risk than longer-dated paper.

Another investor base that may want to evaluate an allocation to short duration fixed income are investors that have turned to income-oriented equity strategies in recent years as an alternative income-generating investment. Today's rate environment may allow an investor to dial back equity risk through a re-allocation to short duration fixed income while not giving up as much income as in the past.

Learn more about the Aegon AM US Short Duration strategy.

Download the full PDF

 

Disclosure:
Past performance is not indicative of future results. This material is to be used for institutional investors and not for any other purpose. This communication is being provided for informational purposes in connection with the marketing and advertising of products and services. This material contains current opinions of the manager and such opinions are subject to change without notice. Aegon AM US is under no obligation, expressed or implied, to update the material contained herein. This material contains general information only on investment matters; it should not be considered a comprehensive statement on any matter and should not be relied upon as such. If there is any conflict between the enclosed information and Aegon AM US' ADV, the Form ADV controls. The information contained does not take into account any investor's investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to you. The value of any investment may fluctuate. Investors should consult their investment professional prior to making an investment decision. Aegon AM is not undertaking to provide impartial investment advice or give advice in a fiduciary capacity for purposes of any applicable federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.

The information presented is for illustrative purposes only. Individual accounts may vary based on restrictions, substitutions, cash flows and other factors.

Results for certain charts and graphs are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions.

Specific sectors mentioned to not represent all sectors in which Aegon AM US seeks investments. It should not be assumed that investments of securities in these sectors were or will be profitable. References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell, or hold such securities. Aegon AM US products and strategies may or may not include the securities referenced and if such securities are included, there is no representation that such securities will continue to be included.

Diversification does not ensure a profit nor guarantee against loss.

Aegon AM US may trade for its own proprietary accounts or other client accounts in a manner inconsistent with this report, depending upon the short-term trading strategy, guidelines for a particular client, and other variables.

There is no guarantee these investment or portfolio strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest over the long-term, especially during periods of increased market volatility.

This document contains "forward-looking statements" which are based on the firm's beliefs, as well as on a number of assumptions concerning future events based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein.

Aegon Asset Management US is a US-based SEC registered investment adviser and is also registered as a Commodity Trading Advisor (CTA) with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Aegon Asset Management US is part of Aegon Asset Management, the global investment management brand of the Aegon Group.

Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent of Aegon Asset Management US, 4333 Edgewood Rd NE, Cedar Rapids, IA 52499. ©2018 Aegon Asset Management US. AdTrax Code:2129487.1. Exp Date: 5/31/2019.