Short-term credit: a tool for uncertainty

In an uncertain and volatile market, being able to dynamically manage and adapt one's cash and short-term allocation is key in order to capture potential outperformance while preserving liquidity. This requires special skills, resources and tools that few asset managers possess.

Money market funds and short-dated credit strategies have rarely been so important to institutional portfolios. They offer yields which are still relatively high – despite recent rate cuts – a defensive buffer against economic and market stress, and a launchpad for higher-yielding assets when dynamics turn more favourable.

In other words, they have become a structural component of portfolios, not merely a place to park spare cash.

As investors build strategic exposures to cash, they are seeking managers who can deal with fast-moving credit quality and can anticipate the trajectory of rates.

Managing interest rate expectations

In managing short-dated credit assets, the likely direction of interest rates is a key variable.

For money market funds, to comply with regulation, Ostrum Asset Management (Ostrum AM), an affiliate of Natixis Investment Managers, systematically hedges assets with maturities of longer than 13 months to minimise interest rate risk. “For shorter maturities, hedging is less systematic, but we maintain a defensive approach to achieve low volatility and steady performance”, according to Fairouz Yahiaoui, money market and short-term credit portfolio manager at Ostrum AM.

Short-term credit funds, on the other hand, are less constrained by regulation and are positioned according to Ostrum AM’s expectations of the short-term yield curve. “This means we can be flexible in terms of timing or yield curve positioning,” says Emmanuel Schatz, a short-term credit portfolio manager at Ostrum AM.

For example, at end September 2025, the market is hardly pricing any chances of further ECB rate cuts this cycle. However, Ostrum AM believes there is room for perhaps one more rate cut. “We think the strong euro and stable inflation may allow for another cut, but the yield curve is not discounting this,” says Emmanuel.

To implement its contrarian view, Ostrum AM has a variety of tools at its disposal, such as eschewing the hedging of fixed rate assets or implementing a hedge that has a different maturity than the reference bond.

Managing credit quality

With credit spreads as tight as they have been in recent memory and the economic environment uncertain, the evaluation of credit quality is critical. In fact, issuer selection is the greatest driver of alpha in Ostrum AM’s short-dated portfolios.

The economic environment has been particularly volatile in 2025 and remains so. The US-EU agreement, for instance, seemed to have settled the tariffs issue, but the US Administration subsequently called on Europe to impose ‘secondary tariffs’ on China and India. Within the US, the jobs market has deteriorated, and in Germany, recession still grips the economy. Russia, meanwhile, has become steadily more bellicose towards Europe.

Amid the context, managers of short-term credit funds have the opportunity to differentiate their portfolios. Finding credits that ally great liquidity to strong yields requires extensive resources. Ostrum AM’s portfolio management team is supported by sustainability & credit analysts, market strategists, risk analysts, and ESG experts.

The team rates issuers on a 1-5 scale according to both their long-term and short-term credit outlook, liquidity and ESG.

Ostrum AM’s investment universe comprises hundreds of issuers. “We can actively monitor it with our 22-strong credit and sustainability analysis team,” says Fairouz. In addition, for money market funds, a dedicated committee, including risk managers, independently decides which issuers can be included in the universe available to portfolio managers.

It is, she says, also a big advantage that Ostrum AM manages both money market and short-term credit funds. The teams work in unison, identifying potential arbitrages between commercial paper and bonds and other short-term credit instruments. “We may discover, for instance, that there is a higher return for commercial paper than for bonds of same company with the same risk and maturity,” says Fairouz.

Liquidity, liquidity, liquidity

Emmanuel says: “Currently, we favour low-beta positions, to limit our exposure to a potential spike in credit spreads.”

These low-beta assets ensure that portfolio value should remain resilient in the case of a sudden market volatility. If market spreads widen, Ostrum AM seeks to turn it into an opportunity through higher-beta assets.

If market volatility spikes, liquidity would likely decline sharply, which is relevant to both short-dated credit and money market funds – but especially to money market funds.

So liquidity management is essential. Ostrum AM’s money market portfolios have a high percentage of assets with maturities of between one and seven days. “Commercial paper issued by European banks can readily be sold on a same day basis, giving us excellent liquidity,” says Fairouz.

With €53bn in money market assets under management, Ostrum AM is one of the biggest players in European money markets, which provides market-leading access to banking counterparties.

Political strife in France presents opportunities

Sometimes, the prevailing market environment can present a particularly strong opportunity. One such opportunity for credit managers in 2025 is the predicament of the French government, which has struggled to design a deficit-cutting budget that meets with the approval of parliament. Subsequent government collapses led Fitch to downgrade the French sovereign rating from AA- to A+.

Ostrum AM sees this as a potential buying opportunity. Emmanuel cites two reasons for this view. First, yields on French debt are already in line with those of Spain and Italy, which command lower agency ratings. This indicates that the market has discounted further French sovereign downgrades.

Second, corporate spreads may widen to reflect the sovereign downgrade, but that, Ostrum AM believes, would in most cases not be justified by fundamentals. Some of the big issuers, for example, only have a small percentage of their operations in France and are likely to be less affected by national politics.

Besides, of the domestic-focused issuers, French financial institutions have relatively healthy balance sheets, strong financial ratios and sufficient liquidity, Emmanuel points out.

“If there is more political upheaval, there could be some good investment opportunities across banks, utilities or the construction sector,” says Emmanuel.

Why now for short credit?

Although the ECB rate was cut from 4% in 2023 to 2% in 2025, it is still at an attractive level compared with the long post-financial crisis era of near-zero. “It can make sense to capture this return by investing in short-term credit funds, while waiting for more steepening of the yield curve and then investing at the longer end,” says Emmanuel.

The catalyst for a price rise in longer-dated yields could be increased government borrowing in Europe due to defence spending and ballooning social payments; US-imposed tariffs; or the inflationary impact of the forthcoming €500bn German infrastructure investment fund.

Emmanuel says: “If you fear more inflation, then you don’t want to hold too many long bonds right now. The shorter end of the curve is a better place to be – in money markets and short-dated bonds.”

Written in September 2025