Uncertainties on the bond markets

In the final weeks of last year and the initial weeks of the new year, the bond markets were dominated by speculation about when the interest rate cuts by the major central banks in the USA and the Eurozone will begin and how extensive they will be. Whether there will be rate cuts is undisputed, but the timing and tempo are still unclear. And, depending on the development of the economy and inflation, it is also certainly possible that long-term yields will actually increase or stagnate, despite declines in short-term yields and key rate cuts.

After a decade of extremely expansive monetary policy with huge purchases of bonds by the central banks, one must bear in mind that these institutions are not all-powerful. The central banks have relatively little control over long-term bond yields, providing that they do not go back to making massive purchases of bonds again. Looking to the immediate future, however, such purchases may appear highly unlikely.

Rare market constellation is favourable for short-dated bonds

In this environment fraught with uncertainties, we are currently seeing a quite rare constellation, as bond yields on the short end are now higher than long-term bond yields. Consequently, at the moment remaining flexible and keeping the capital commitment period comparatively short is not a disadvantage. On the contrary.

More on current developments on the bond markets.

Raiffeisen-Nachhaltigkeit-ShortTerm is attractive, thanks to its short capital commitment period and attractive returns

The fund has been able to perform very well in this environment in the last two years. Its portfolio of bonds has not suffered much from price losses stemming from rising bond yields thanks to the short maturity structure, and at the same time it has booked attractive interest income. This will also continue to be supportive for Raiffeisen-Nachhaltigkeit-ShortTerm.

Not just short-term and profitable, invest sustainably as well

Raiffeisen-Nachhaltigkeit-ShortTerm invests in short-dated bonds issued by entities with strong credit ratings (i.e. investment grade). At present, the average rating of the bonds in the fund is A+ (Standard & Poor’s), representing a very high level of credit quality. The fund portfolio is structured so that the average remaining maturity of the portfolio may not exceed three years. As an additional factor, the fund may only invest in bonds from issuers that are classified as sustainable on the basis of ESG criteria.

Along with bonds from countries and state-affiliated or supra-regional issuers (the World Bank, for example), Raiffeisen-Nachhaltigkeit-ShortTerm can invest up to 50% of the fund assets in corporate bonds and covered bonds. For some time Raiffeisen-Nachhaltigkeit-ShortTerm has almost completely exploited this 50% ratio, which has turned out to be a good strategy so far. Because corporate bonds and covered bonds have offered and continue to offer attractive additional returns above government bonds, but they also involve higher risks. As a result, it is not advisable to include them in portfolios in every market phase, and good asset selection and diversification, in conjunction with constant monitoring of market trends, are necessary. In this regard, the investment experts at Raiffeisen KAG continue to focus on high-quality issuers at the moment.

Currently, the average yield in the fund portfolio is approximately 3.5% p.a., with a duration of 1.15 years (average capital commitment period).