Maximizing Carry while Minimizing Sensitivity to Rates and Spreads
| “In an environment where the credit spread curve has flattened, longer-maturity bonds no longer offer sufficient additional yield to compensate for their higher sensitivity to market movements.” Emma Otmani, CFA – Junior Portfolio Manager at IVO Capital Partners |
IVO Capital Partners’ View
- Active duration management: the fund actively adjusts duration based on market opportunities identified by the team.
- Flattened spreads curve: a unique environment where a short-dated investment horizon becomes more efficient, while still delivering attractive carry.
- Resilience under stress: short-duration bonds have historically exhibited more limited drawdowns and faster recoveries during periods of shock.
- Supportive market momentum: the reopening of the EM primary market, combined with early redemptions on discounted callable bonds, creates additional upside levers in portfolio construction.
In the emerging market corporate universe, today’s investment landscape is shaped by a clear trend: the flattening of the credit spread curve. Yields across different maturities have converged, reducing the economic interest of extending duration. While duration is often described as a measure of rate sensitivity, it also captures price sensitivity to credit spread movements, all else equal. Thus, in an environment where the spread curve has flattened, longer-maturity bonds no longer offer enough incremental yield to justify their higher sensitivity to market volatility. In this context, short-duration strategies position investors on the most efficient part of the curve—where carry remains attractive and the return profile is more stable and easier to assess.
Short Duration: an Optimized Balance Between Yield and Visibility
This year, the spread curve has flattened across all emerging market credit segments, significantly reducing the benefit of extending duration to capture additional risk premium. Today, extending maturity is poorly compensated in a market where spreads have tightened.
A 4-year duration BB bond offers only about 21 bps more spread than a 3-year BB bond — a marginal pickup given the additional sensitivity to market movements. In the B segment, the difference is even smaller, around ~10 bps between 3 and 4 years. It is therefore no longer necessary to add duration to obtain higher spreads, as the term premium has become less attractive.
Furthermore, the BB spread curve may appear inverted at certain maturities, particularly when comparing 7-year duration vs 6- or 5-year bonds. This apparent inversion is both a reflection of curve flattening and an issuer-profile bias. Longer-duration bonds are generally issued by stronger companies, naturally trading at tighter spreads — creating the illusion of curve inversion despite the lack of like-for-like comparability.
In this environment, a strategy focused on short duration appears optimal, optimizing carry while limiting exposure to market movements and preserving stronger liquidity, without sacrificing meaningful credit premium. Macro perspectives reinforce this: JP Morgan expects the 10-year UST to rise to 4.35% by end-2026, driven by U.S. fiscal concerns and a higher expected term premium.
A Narrower Window of Credit Uncertainty
Short-maturity bonds are priced based on near-term, observable factors (liquidity, refinancing, proximity to a call), unlike long maturities, which depend more heavily on medium- to long-term financial projections. This improves risk transparency and enhances yield visibility for emerging market corporate investors.
Stronger Technical Support on the Secondary Market
During market stress, investors typically reduce exposure first to securities most sensitive to mark-to-market movements — usually long maturities, whose prices react more strongly to rate and spread changes, making them more volatile. Shorter bonds, by contrast, experience smaller price fluctuations and generally face fewer forced sales on the secondary market. Their valuation also becomes more predictable over time, converging more rapidly toward par due to their shorter maturity.
Stress Resilience: the Suzano Case Study
Suzano bonds illustrate the efficiency of the short end during market turbulence. After the Liberation Day dislocation in early April, the Suzano 28 (short duration) returned to its pre-event price in 13 days, versus 59 days for Suzano 47. With comparable credit profiles, the shorter maturity demonstrated significantly faster recovery — underscoring the value of positioning on the most efficient maturity bucket especially when duration compensation is marginal.
Primary Market Reopening and Opportunities Around Calls
After a slowdown in 2022–2023, the emerging market primary market reactivated in 2024, particularly in High Yield. At IVO Capital Partners, we focus on callable bonds trading below their call price, where early redemption or refinancing can generate upside and create asymmetric return potential (e.g. Aydemt 27, Edvln 26).
We also identify a broader source of alpha: deeply discounted issuers that were locked out of the primary market, but whose return with credible refinancing plans has lowered perceived risk and tightened valuation gaps, offering additional performance opportunities in portfolio construction (e.g. Weschi 26, Aragvi 26).
Conclusion: Short Duration as a Strategic Advantage in Today’s Fixed-Income Environment
In emerging market corporates, short-duration bonds should be viewed not as a tactical choice driven solely by rate volatility, but as a rational sensitivity/carry optimization in a flattened spread-curve environment. Today, the additional spread offered by longer maturities is marginal and no longer compensates for the higher rate/spread sensitivity of long-duration bonds.
Short duration thus stands out as an efficiency anchor: capturing elevated carry, improving credit-risk visibility, and maintaining a more defensive technical profile on the secondary market — especially in market stress periods.
Beyond curve dynamics, the short end benefits from strong catalysts. In a reopened primary market, credible refinancing plans and early redemptions of short-dated callable bonds (via call exercises or refinancings) provide additional upside potential. This performance driver is structurally more prevalent in shorter maturities and today represents a visible source of alpha for actively managed portfolios.
Within the IVO Emerging Markets Corporate Debt fund, duration has been actively reduced to 2.9 years (vs 4.6 years in September 2023), reflecting our approach of maximizing carry while minimizing volatility. Despite the reduction in duration, the fund yield remains 7.1% in euros — well above euro money-market funds, currently yielding around 2.1%. This confirms that a short-duration positioning can reduce market sensitivity without sacrificing credit-risk compensation.
Sources : IVO Capital Partners, Bloomberg, JP Morgan. All financial data as of 01/12/2025.
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