Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

February 18, 2022 | GSAM Connect

Short Duration Opportunities in a Dynamic Rate Environment

As investors revisit their fixed income and cash strategies in what is a new dynamic rate environment, we provide an update on short duration fixed income and why we think the asset class looks compelling.

Central banks are continuing to respond to inflation running persistently higher than previously forecast. This is a significant focus area for fixed income investors who continue to monitor key underlying metrics such as rents and wage growth. The Federal Reserve, Bank of England and European Central Bank have all performed hawkish pivots in recent months, causing sharp rate selloffs and higher yields. The pace and size of future rate hikes, as well as the removal of quantitative easing, are therefore top of mind. Economic growth is expected to be robust in 2022 but slower versus the sharp rebound seen during the pandemic recovery of 2021. Given the rate market volatility and supply technicals, credit spreads have also experienced modest volatility over the near term. Over the long term, we remain constructive on high quality credit given the strong growth backdrop and robust bottom-up fundamentals. Additionally, geopolitical tensions pose concerns to risk assets with the potential to drive volatility higher.

Why should investors consider short duration strategies now?

We believe short duration may offer an attractive risk-adjusted opportunity as investors revisit their fixed income and cash strategies in the new dynamic rate environment. Short duration strategies are complementary to both cash and longer-dated fixed income allocations, typically offering both potentially lower volatility than longer duration bonds while preserving most of the carry. Moreover, short duration strategies offer the potential of higher yields compared to money market securities, in addition to greater diversification.

Many investors have also built up high levels of cash, often with relatively long investment horizons, and are seeking to optimise. We believe that active management may provide a performance advantage in today’s fast-moving environment. For example, light-footed, tactical positioning around central bank moves and a sharp focus on what is priced in versus our own view of the future can potentially drive outperformance.  

Where do you see the greatest opportunities and risks within short duration assets?

We maintain our long-standing overweight view on credit, particularly on BBB-rated issuers which we believe offer attractive risk-adjusted potential. In more flexible strategies we continue to see select opportunities in emerging market corporates and sovereigns, high yield corporates as well as high-quality, low spread duration securitized instruments (e.g. non-agency mortgage-backed securities and collateralized loan obligations).  At the sector level, fundamentals and technicals remain supportive for front-end investment grade credit and in 2022 we expect steadily improving credit profiles, elevated margins, and more upgrades, all of which point to potentially excess returns driven by carry and roll as opposed to spread compression.  Euro short duration has become particularly interesting to investors seeking positive yields, and in the current environment we are tactically defensive.

How does Goldman Sachs Asset Management approach short duration investing?

Our Liquidity Solutions portfolio management team has deep expertise across the full spectrum of front end markets, managing over $690 billion1. In both funds and customised separately managed accounts we strive to deliver global, actively managed, balanced portfolios expertly constructed to provide exposure to diversified sources of return, with a focus on risk management. ESG is integrated into our fundamental credit process, and in many cases also portfolio objectives and construction. Our dedicated Liquidity Solutions portfolio management team invests with a multi-sector approach to ensure that our high caliber ideas from across our 300+ person global fixed income business are identified and appropriately implemented. 


1. As of December 31, 2021

Stay posted on the latest market developments and key themes for your portfolios and practices.
Get Connected

Related Insights

Fine-Tuning Your Fixed Income as Rates Rise

Financial markets expect the Federal Reserve to raise interest rates six times this year to counter persistent inflation, and market pricing remains very fluid. In our view, it may be time for investors to consider fine-tuning their fixed-income allocation.

Global Fixed Income Weekly: MusinGS

In this weekly insight, we bring the global economy and fixed income markets to you. Macro at a Glance covers the latest developments in growth, inflation, and labor markets, while Policy Picture and Central Bank Snapshot details our outlook for monetary and fiscal policies. Fixed Income Navigator summarizes how our view of the world and financial markets informs and impacts our investment views.

Credit Check-In: Ideas in Credit

Faced with a complex macro backdrop, central banks will be seeking to deliver “goldilocks” policy normalization to keep inflation in check and neither too hot nor too cold. An unwind of easy macro policies, high inflation and virus uncertainty is somewhat counterbalanced by positive economic and corporate earnings growth alongside healthy private sector balance sheets. This backdrop, combined with technical factors, creates interesting opportunities in credit markets.