NEW YORK: Investors looking to generate more than 5% yield in money market securities should buy corporate bonds maturing in five years or less to lock in those returns for longer, according to Picton Mahoney Asset Management.

Adding the debt allows investors to hold on to those high yields for an extended period of time compared with money markets, which usually comprise securities coming due in a year or less, said Phil Mesman, head of fixed income at the Toronto-based hedge fund.

“There’s an amazing opportunity for investors, generally speaking, in short-dated corporate bonds,” said Mesman, referring to debt rated BB, the highest junk rating, and debt with a BBB rating, the lowest rating in investment grade.

The Bloomberg Short-Term Government/Corporate Statistics Index, which tracks the performance of US$2.3 trillion in corporate and government debt maturing in six months that’s typically included in money market funds, last week recorded a yield of 5.49%, the highest on record, based on data going back to 2004.

That compares to 1.8% a year earlier, after the Federal Reserve (Fed) began hiking interest rates.

In comparison, a gauge pulling together highly rated corporate bonds with a maturity of five years or less yielded 5.62% last week, more than double the 10-year average.

A similar index of securities rated BB stood at 7.3% last week, up from 5.3% a year earlier.

With money market fund investments, “you have to reinvest, and yields are not going to be up there,” Mesman said. “They’re going to normalise back down to a lower level,” he said.

Picton oversees about C$9.3bil (US$6.8bil or RM31.3bil) of assets, mostly in the United States and Canada.

Investing in corporate bonds that mature before or in 2028 could also be attractive due to tax reasons, Mesman said.

Shorter-dated corporate debt also faces less interest rate risk as the central banks’ recent hikes are already priced in, he said.

“In the case of longer-duration debt, you have more uncertainty around rate risk and credit risk for bonds beyond five years,” Mesman said.

Many rate swap traders are betting on one final hike in the United States and Canada during the second half of the year, according to data compiled by Bloomberg.

In the United States, traders expect rate cuts early next year based on the implied rate of swap contracts.

The Bank of Canada’s next monetary policy meeting is scheduled for June 7, while Fed officials are set to meet one week later.

 - Bloomberg