Changing Behaviour - Why investors should be wary of cash or short duration bonds

12 October 2023

BondsCash flowFixed IncomeGatekeeperGatekeepersInvestmentsRecession

Expert: Jason Borbora-Sheen, Portfolio Manager, Ninety One Moderator: Sascha Calisan, Director, Davies Group


  1. Why not just cash or short-duration? Four reasons key reasons: cushioning, re-investment risk, opportunity cost, and no flexibility
  2. Short-duration, fixed-income, and safety are not synonymous with one another
  3. The danger of the ‘bond’ label is that it hides a wide range of behaviours. Some fixed income assets also behave more like equities than government bonds
  4. Some non-fixed income securities can be part of the solution with income resilience offering an alternative to risky ‘fixed’ income


When it comes to the costs associated with holding cash and 1-2 year low coupon gilt, rather than the capital risk associated., the following 4 key reasons support this argument:

  1. Cushioning: when the risk-free rate increases significantly, it also tends to come down again quickly. The higher return from risk-free holdings should act as a ‘cushion’ against making losses on risker assets
  2. Re-investment risk: something needs to be done with the proceeds of holding short duration bonds and cash accounts when lower rates present themselves)
  3. Opportunity cost: e.g. if fixed income and longer duration fixed income takeover relative to equities, the 5% nominal return may actually be quite a significant opportunity cost in a relative sense
  4. No flexibility: if opportunities present themselves, you’re locked in or risk making a market-to-market loss on short maturity bonds.

Short-duration, fixed-income and safety are not synonymous:
The drawdown can be significant and the correlations to equities also tend to be higher in a more inflationary regime. With credit, you take on significant downside risk in a recessionary environment. However, short duration is almost as badly hit (both investment grade and high yield). When you contemplate the risk/reward, whether that be short-duration, high yield, or investment grade, you don’t have a great deal of potential upside.

Fixed income is riskier than it seems:
The quality has deteriorated. Locking-in resilient yield can navigate different environments - a defensive alternative to short-duration. Cash returns are likely to decline quite quicky in a recession.

Some non-fixed income securities can be part of the solution. It’s better to focus on the outcome. Income resilience offers an alternative to risky ‘fixed’ income.

Equity in a company with a strong balance sheet equals a resilient outcome:
J&J, P&G, Pepsi behave like a bond - dividend per share over time behaves like a real coupon moving with inflation through time, and more like high yield bonds in terms of risk. Government cash-flows in an equity wrapper also equal a resilient outcome.

HICL (and those like it) are often inflation linked and now trading at a discount, having gone through many years of not. Both these options are interesting alongside sovereign bonds, with that call option over the top.

Key takeaways:

  • Options can capture market upside if we are wrong about recession
  • Options combined with the physical bonds leads you to quite a similar profile to credit but with less drawdown. You can create ‘credit’ without having to own the downsides