Crossing borders: A global approach to short-duration credit

May 27, 2025

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An allocation to global short-duration crossover credit may offer US and US dollar-focused investors multiple benefits, argues Eric Schure.

In an environment marked by uncertainty and heightened interest rate volatility, fixed income investors are increasingly prioritizing strategies that limit duration risk while balancing capital preservation and income generation.

For those with an appetite for higher-quality, short-duration credit, we believe global multi-sub-asset class portfolios offer compelling advantages. These strategies not only provide diversification benefits, but also present yield-enhancing opportunities relative to purely US-focused exposures.

Based on our analysis, expanding the investment universe beyond US investment grade (IG) bonds to include global credit, hedged back into US dollars, improves both total and risk-adjusted returns.

Enhanced yield generation with a global crossover approach

A crossover short-duration approach blends global IG and high yield (HY) credit into a single mandate, while maintaining an average IG rating. We believe this type of strategy should be a consideration for fixed income investors looking to maximize risk-adjusted return potential.

Figure 1 shows the impact of blending different credit sub-asset classes to construct a diversified portfolio.

In this exercise, we first use a pure (100%) US short-duration IG index (Portfolio 1). For Portfolio 2, we add a 30% allocation to US short-duration high yield (HY). Portfolio 3 introduces global exposure by adding an allocation into short-duration European IG and HY, all hedged back to USD. We diversify the mix further in Portfolio 4, adding emerging market IG and HY and loan allocations across multiple markets (all hedged back to USD).

As demonstrated below, adding these sub-asset classes and regions to a portfolio improves both returns and the risk-adjusted return profile (as measured by the Sharpe ratio) over time, underscoring the strength of these asset allocation decisions.

Figure 1: Optimising risk-adjusted returns

 

Past performance is not a reliable indicator of current or future results.

Index performance is for illustrative purposes only. You cannot invest directly in the index.

Source: ICE Index Platform and Muzinich, as of 31st March 2025. For illustrative purposes only. Please note: back-tested performance is not a forward-looking application of stated investment methods or criteria and does not reflect investment decisions made in real time with actual financial risk.

Indices used: US HY: ICE BofA 1-3 Year US Corporate Index (C1A0); US IG: ICE BofA 1-3 Year US Cash Pay High Yield Index (J1A0); EU IG: ICE BofA 1-3 Year Euro Corporate Index (ER01); EU HY: ICE BofA Euro High Yield Index (HE00); EM IG: ICE BofA High Grade Emerging Markets Corporate Plus Index (EMIB); EM HY: ICE BofA High Yield US Emerging Markets Liquid Corporate Plus Index (EMHY); US Loans: Credit Suisse Leveraged Loan Index (CSLLI); European Loans: Credit Suisse Western European Leveraged Loan Index (CSWELLI). All asset class returns are hedged back into USD. Indices selected represent best proxy to highlight asset classes being discussed. For illustrative purposes only.

Diversification via non-correlation

Looking back over the last 20 years, annualized returns from global credit sub-asset classes (all hedged back into USD) highlight low correlation (Figure 2). For a global portfolio, this helps reduce risk (volatility) and improves Sharpe ratios - especially in higher-yielding asset classes. In particular, European IG has proven an effective diversifier in the front-end yet still offers compelling hedge-adjusted yields versus US IG.

Figure 2: Credit sub-asset classes exhibit relatively low, yet varying, degrees of correlation

Diversification does not assure a profit or protect against loss.

Source: ICE Index Platform, as of 31st March 2025. US HY: ICE BofA 1-3 Year US Corporate Index (C1A0); US IG: ICE BofA 1-3 Year US Cash Pay High Yield Index (J1A0); EU IG: ICE BofA 1-3 Year Euro Corporate Index (ER01); EU HY: ICE BofA Euro High Yield Index (HE00); EM IG: ICE BofA High Grade Emerging Markets Corporate Plus Index (EMIB); EM HY: ICE BofA High Yield US Emerging Markets Liquid Corporate Plus Index (EMHY); US Loans: Credit Suisse Leveraged Loan Index (CSLLI); European Loans: Credit Suisse Western European Leveraged Loan Index (CSWELLI). Indices selected represent best proxy to highlight asset classes being discussed. For illustrative purposes only. All asset class returns are hedged back into USD. For illustrative purposes only, not to be construed as investment advice.

Cross-currency hedging: Unlocking yield in global credit markets

While investors have several tools to enhance yield without increasing credit risk - such as curve positioning or relative value analysis – we believe cross-currency hedging offers another compelling opportunity. By purchasing bonds issued in non-USD currencies and hedging the associated foreign exchange risk, investors can potentially earn higher yields than those available from comparable US dollar-denominated bonds of the same credit quality.

Currently, European base rates remain below US rates. However, this is more than offset by wider credit spreads and the favorable currency hedging differential available to USD-based investors. When comparing hedge-adjusted yields across markets, European IG credit offers a meaningful yield advantage in the current environment.

As Figure 3 illustrates, this yield pickup can fluctuate over time, influenced by a range of factors including interest rate differentials, credit spreads and FX forward pricing. We believe active global managers can effectively adjust portfolio exposures to take advantage of these dynamics, leveraging cross-currency strategies as a valuable means of enhancing income without sacrificing credit quality.

Figure 3: EUR short duration IG currently offers a 40bps hedge-adjusted yield advantage over USD short duration IG

Source: Bloomberg & Muzinich, as of 19th May 2025. LF99TRUU Index, .1-3EUIGH U Index. Indices selected by Muzinich represent best proxy to highlight short-term hedging differentials in EU and USD. For illustrative purposes only.

Time to go global

Given geopolitical and economic uncertainty, we believe now is an especially compelling time to move beyond a US-focused approach into a global short duration credit mandate.

With US credit markets well-owned and spreads hovering near historic tights, investors can seek to broaden their opportunity set by accessing global markets - particularly in Europe and Asia - which offer attractive relative value, potential higher hedged yields and greater dispersion. 

Currency hedging dynamics also currently favor US-dollar investors, allowing them to capture yield from foreign markets while neutralizing currency exposure. Additionally, diverging central bank policies and credit cycles across regions can provide additional opportunities for active management and relative value trades.

By expanding the investment universe, a global credit strategy provides access to a broader array of issuers, sectors and return profiles, offering the potential for portfolios to be resilient and opportunistic whatever the market environment.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of May 2025 and may change without notice.

 

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Index descriptions

LF99TRUU Index – The Bloomberg US Corporate 1-3 Year Index measures the investment-grade, fixed-rate, taxable corporate bond market with 1-3 year maturities. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers

C1A0  - ICE BofA 1-3 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity less than 3 years

J1A0  - ICE BofA 1-3 Year US Cash Pay High Yield Index is a subset of ICE BofA US Cash Pay High Yield Index including all securities with a remaining term to final maturity less than 3 years.

ER01 – The ICE BofA  1-3 Year Euro Corporate Index is a subset of ICE BofA  Euro Corporate Index (ER00) including all securities with a remaining term to maturity less than 3 years.

EMIB – The ICE BofA  High Grade Emerging Markets Corporate Plus index is a subset of the ICE BofA  Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EMHY - The ICE BofA High Yield US Emerging Markets Liquid Corporate Plus Index is a subset of The ICE BofA US Emerging Markets Liquid Corporate Plus Index including all securities rated BB1 or lower. The ICE BofA US Emerging Markets Liquid Corporate Plus Index tracks the performance of U.S. dollar denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.

S&P UBS LLI – The S&P UBS Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated leveraged loan market.

S&P UBS WELLI – The S&P UBS Western European Leveraged Loan Index is designed to mirror the inestimable universe of the Western European leveraged loan market.

ICE BofA Euro High Yield Index (HE00) ICE BofA Euro High Yield Index tracks the performance of EUR denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch) and at least 18 months to final maturity at the time of issuance. In addition, qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the eurobond and euro domestic markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included. Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and non-cumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index. Securities in legal default, equitylinked and euro legacy currency securities are excluded from the Index. Securities issued or marketed primarily to retail investors do not qualify for inclusion in the index. Index constituents are market capitalization weighted. Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month and then are removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. Information concerning constituent bond prices, timing and conventions and index governance and administration is provided in the ICE Bond Index Methodologies, which can be accessed on our public website (https://indices.ice.com), or by sending a request to iceindices@ice.com. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. New issues must settle on or before the following calendar month end in order to qualify for the coming month. No changes are made to constituent holdings other than on month end rebalancing dates.

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