Fixed Income

Global Short Duration strategy Strong rebound following unprecedented central bank stimulus

  • 22 May 2020
  • 7 min read

Key points:

  • Credit spreads significantly tightened on the back of unprecedented global central bank stimulus and…
  • …despite historically weak economic data releases
  • We keep on gradually adding to attractive opportunities in high yield and emerging markets

What’s happening?

Despite historically weak economic data releases, credit spreads significantly tightened in April driven by the unprecedented accommodative monetary support from global central banks, a slowdown in new coronavirus cases and the lifting of lockdown measures in some countries towards month-end.

The US Federal Reserve continued its policy support, as it implemented a new loan programme worth up to $2.3 trillion, while stating that it would do whatever was necessary to back the economy. The European Central Bank announced an extension to its record-low interest rate loan facilities to banks, while maintaining its €750 billion bond-buying programme.

Despite this risk-on environment and large amounts of government debt issuance, US treasury, German bund and UK gilt yields still fell as global central banks stepped up their sovereign bond purchases.

Portfolio positioning and performance

Sovereign: we remain invested in short-dated US treasury inflation-linked bonds due to attractive valuations.

Investment Grade: we kept on gradually reducing our bias towards investment grade in order to capture attractive opportunities in high yield and emerging markets. We were still active in the primary markets, buying US chemical company DuPont in US dollars and French real estate company Unibail in euros, both being new additions to the strategy. We also started to gradually reduce our exposure to European peripheral names that had recently outperformed.

High Yield and Emerging Markets: we continued to add to high yield and emerging markets, buying the new issue from US media company Netflix in euros and investing in some Asian corporates. Due to the gradual re-risking undertaken since late March, we now have a 26% allocation to high yield and emerging markets – up from 19% at the end of February – and are therefore getting closer to our long-term neutral allocation of 30%.

Outlook

While the outlook remains uncertain despite unprecedented fiscal and monetary support globally, the widening of spreads since late February has made us more positive on risk assets and, as such, we started to gradually add risk to the strategy.

Should the coronavirus outbreak stabilise and/or spreads widen further, we will look to keep on gradually adding to high yield and emerging markets by reducing our allocation to investment grade.

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.

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.