Short-dated credit: income without the rate call

Short-dated euro credit offers attractive income without requiring investors to make a precise forecast of interest rates.

• The ECB deposit rate is already 2.5%, while forward markets price the euro cash rate near 3.5% in one year, so much of the potential tightening has already been reflected in markets.
• Breakeven yields on one-to-three-year credit are near decade highs, and yields would need to rise by more than 2.5% for the asset class to generate a negative 12-month return.
• One-to-three-year euro credit yields are approximately 3.8%; yields have exceeded 3.25% in only about 25% of monthly observations over the past decade.
• After periods when yields exceeded 3.25%, annualised returns averaged 5.0% over 12 months, 4.7% over 24 months and 4.6% over 36 months.
• Short-dated credit outperformed cash in 73% of subsequent 12-month periods, 82% over 24 months and 97% over 36 months, with average annual outperformance of 1.6% to 1.8%.

Takeaway: Investors waiting in cash for a clearer rate signal may miss the income opportunity in short-dated credit, although further rate rises and geopolitical risks remain possible.