High-Yield Fixed Income in a Rising Rate Environment: The Tactical Case for Short-Duration Funds

Navigating Rising Rates: The Strategic Edge of Short-Duration High-Yield Funds

The Federal Reserve's aggressive rate hikes in 2022–2023-raising the federal funds rate by 525 basis points-exposed the vulnerabilities of longer-duration fixed-income portfolios. As inflation surged to 9.1% in June 2022, investors faced a stark reality: traditional high-yield bonds, with their longer maturities and higher interest rate sensitivity, often underperformed during tightening cycles. In this environment, short-duration high-yield funds like the Barings Global Short Duration High Yield Fund (BGH) emerged as tactical alternatives, offering a balance of income generation and risk mitigation.

The BGH Strategy: Short Duration, High Yield

BGH's investment approach is anchored in a weighted average portfolio duration of three years or less and a maturity of five years or less, according to Barings' fund page. This structure inherently reduces exposure to interest rate volatility compared to longer-duration high-yield funds. For instance, during the 2016–2018 rate hike cycle, when the Fed raised rates from 0.50% to 2.25%, BGH delivered a 29.71% total return in 2016 and rebounded with a 21.50% return in 2019, according to its CEFConnect profile. While it recorded a -9.38% return in 2018, its short-duration profile cushioned losses relative to broader high-yield benchmarks.

The fund's focus on global high-yield bonds and loans-80% of which are below investment grade-also allows it to capitalize on relative-value opportunities. Barings' fundamental credit analysis identifies mispriced assets across geographies, particularly in North American and Western European markets. This active management approach complements its short-duration strategy, enhancing resilience during rate hikes.

Performance in 2022–2023: A Test of Resilience

The 2022–2023 rate hike cycle presented a more severe test. BGH lost 19.90% in 2022, a year when the Bloomberg US Aggregate Index fell 13.01%, according to YCharts. However, the fund rebounded with an 18.20% return in 2023, outperforming the index's 5.53% gain. This contrast underscores BGH's ability to recover quickly in a shifting rate environment. Analysts attribute this to its shorter duration, which minimized price declines when rates spiked, and its high-yield focus, which provided income to offset capital losses, per YCharts.

Tactical Advantages: Income, Liquidity, and Credit Discipline

BGH's tactical edge lies in three pillars:
1. Income Generation: The fund's monthly distribution of $0.1223 per share (as of August 2025) yields approximately 10.4% annually, supported by a payout ratio of 57.58%, per Barings' fund page. This sustainability is critical in a rising rate environment, where income stability becomes a primary concern.
2. Liquidity Management: By maintaining a short maturity profile, BGH can quickly reinvest maturing securities at higher yields, a flexibility lacking in longer-duration portfolios, as Barings notes.
3. Credit Discipline: Barings' rigorous credit analysis mitigates default risk, even in volatile markets. For example, during the 2018 high-yield selloff, the fund's active risk management helped preserve capital despite sector-wide declines, according to CEFConnect.

Expert Endorsement and Risk Considerations

Analysts have upgraded BGH to "Buy" due to its outperformance relative to peers and its consistent distribution record, according to a StockAnalysis upgrade. However, investors must weigh its credit risk-exposure to below-investment-grade bonds-against its tactical benefits. While short duration reduces interest rate risk, high-yield bonds remain vulnerable to economic downturns and issuer defaults.

Conclusion: A Tactical Allocation for Rate-Insensitive Income

In a rising rate environment, BGH exemplifies how short-duration high-yield funds can serve as tactical allocations. Its combination of income generation, duration management, and active credit analysis positions it to outperform longer-duration peers during rate hikes. For investors seeking yield without sacrificing capital preservation, BGH offers a compelling case-provided they accept the inherent risks of high-yield markets.