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28 November 2016

Bonds due to mature soon could hold the key to navigating volatile markets in 2017

By Nicolas Trindade, manager of the AXA Sterling Credit Short Duration Bond fund

2016 has been a strong year for fixed income but as we look towards the end of the year and beyond, volatility could increase according to Nicolas Trindade, manager of the Elite Rated AXA Sterling Credit Short Duration Bond fund.

“The US presidential election triggered a sharp rise in government bond yields globally,” Nicolas comments. “It is expected that the Trump administration will look to significantly increase fiscal spending, leading ultimately to higher growth, inflation and yields. However, the positive effects from higher spending could be largely mitigated by more protectionism, creating increased uncertainty in terms of potential outcomes and therefore higher volatility.

“As we move into 2017, political uncertainty also looks set to continue in Europe, with elections scheduled in the Netherlands, France and Germany. The outcomes of these elections will have direct implications on the UK in terms of negotiating an exit from the EU. If Article 50 is indeed triggered in March, the negotiations will be taking place during campaign seasons, and may be subject to a lot of posturing, leading most likely to renewed fears of a hard Brexit.

“In the UK, the ability of the Bank of England to act as an efficient backstop is likely to diminish going forward. It has already bought more than one third of the corporate bonds it intended (up to £10billion) in just eight weeks – the program was initially supposed to last up to 18 months.

“In an environment where we expect volatility to remain high, short duration strategies provide a compelling solution for investors as they’ve been able to efficiently minimise volatility and drawdowns in some of the most testing financial markets seen in recent years. More specifically, in our AXA Sterling Credit Short Duration Bond fund, we are keen to maintain a defensive bias to potentially benefit from pockets of weaknesses ahead.”

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Nicolas' views are his own and do not constitute financial advice.