Global Short Duration strategy - The rally continues, but the risks around a second wave increase
- Credit spreads tightened further following widespread easing of restrictions
- The risks around a second wave increased
- We kept on adding to attractive opportunities in high yield and emerging markets
- Credit spreads kept on tightening in June, as optimism grew around the recovery in the global economy following widespread easing of restrictions in developed countries and improving economic data. However, fears of a second wave created nervousness.
- The US Federal Reserve began to purchase individual corporate bond issues, rather than just corporate bond ETFs, while the European Central Bank significantly increased the size of its emergency bond-buying programme to €1.35 trillion.
- Despite the risk-on environment and the prospect of higher borrowing, US treasury, German bund and UK gilt yields were slightly lower at the front-end as they remain anchored by central bank support.
Source: AXA IM as at 30/06/2020. The data is based on a representative account that follows the strategy and is not intended to represent actual past or simulated past performance of the strategy. Past performance is not a reliable indicator of future results. Performance calculations are net of fees, based on reinvestment of dividends.
Portfolio positioning and performance
- Sovereign: We remained invested in short-dated US treasury inflation-linked bonds due to attractive valuations.
- Investment Grade: We continued to gradually reduce our bias towards investment grade in the Fund in order to capture attractive opportunities in high yield and emerging markets. We were still active in primary markets, buying one attractive new issue in US dollar.
- High Yield and Emerging Markets: We continued to add to high yield and emerging markets, participating specifically in several Asian high yield new issues. Due to the gradual re-risking undertaken since late March, we now have a 32% allocation to high yield and emerging markets (up from 19% at the end of February).
Despite all advanced economies forecast to be in recession this year, we have now experienced the shortest bear market ever in credit markets due to the unprecedented monetary and fiscal support.
With the outlook remaining very uncertain and valuations having recovered a long way, we are growing cautious on adding more beta risk at this point and would rather focus on specific pockets of value that have lagged the recovery so far.
Asset class breakdown
No assurance can be given that the Global Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Global Short Duration strategy is subject to risks including credit risk, liquidity risk and interest rate risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets and global investment risks.