Fixed Income

Global Short Duration strategy Summer rally continues

  • 17 September 2020
  • 5 min read

Key points

  • Credit spreads further tightened thanks to a sustained level of monetary and fiscal support
  • Europe is starting to see a second wave of coronavirus
  • We kept the risk profile stable

What’s happening?

Despite persistent worries about spikes in infections across the world, credit spreads continued to tighten in August thanks to a sustained level of monetary and fiscal support from central banks and governments worldwide, China and the US re-committing to their ‘Phase One’ trade agreement, and encouraging news about a coronavirus treatment.

In a significant change in monetary policy, the US Federal Reserve (Fed) announced plans to shift to ‘average inflation targeting’ in an attempt to increase inflation expectations. This also implied that interest rates would likely remain at a low level for longer.

Following the continued risk-on environment and the Fed’s new inflation policy, US treasury, German bund
and UK gilt yields rose in August.

Portfolio positioning and performance

Sovereign: Despite the recent rally, we remained invested in short-dated US treasury inflation-linked bonds due to still attractive valuations.

Investment Grade: We kept our exposure to investment grade constant during the month. We were still active in secondary markets, buying for example US food company Bunge in US dollars.

High Yield and Emerging Markets: We also kept our exposure to high yield and emerging markets constant. We were still active in primary markets, participating in several emerging market new issues. Due to the gradual re-risking undertaken since late March, we now have a 34% allocation to high yield and emerging markets - upfrom 19% at the end of February. As such, we remain slightly overweight versus our long-term neutral allocation of 30%.

Outlook

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, fiscal and regulatory support.

We plan to keep on adding to attractive opportunities in European high yield (lagged the rally) and emerging markets (benefit from the Chinese recovery, a weaker dollar and lower for longer US yields) through primary markets as policy support still provides a strong backstop for credit markets despite more expensive valuations.

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.

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