Fixed Income

Global Short Duration strategy - Summer rally is on, but the risk of a second wave increases

  • 13 August 2020
  • 10min read

Key points

  • Credit spreads tightened further thanks to the continued monetary and fiscal support
  • Risk of a second coronavirus wave around the globe remains a key risk
  • We kept on gradually adding to attractive opportunities in high yield and emerging markets through the new issue market

What’s happening?

Credit spreads kept on tightening in July thanks to the continued monetary and fiscal support from central banks and governments worldwide, promising results from coronavirus vaccine trials, further improvements in economic data, and a positive earnings season so far. However, the persistent rise in global coronavirus infections along with simmering US-China tensions created short-lived bouts of risk aversion.

The US Federal Reserve kept interest rates in a range of 0-0.25% and reiterated its commitment to do what is necessary to bolster the US economy. In Europe, the EU finally ratified the €750 billion recovery fund, which includes €390 billion in grants.

Despite the risk-on environment, US treasury, German bund, and UK gilt yields fell in July as they remained supported by central banks purchases.

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 two attractive new issues in US dollars.

High Yield and Emerging Markets: We continued to add to high yield and emerging markets, participating specifically in several European high yield and Asian new issues. Due to the gradual re-risking undertaken since late March, we now have a 34% allocation to high yield and emerging markets (up from 19% at the end of February). 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.

With the outlook remaining very uncertain and valuations having recovered a long way, we are focusing on specific pockets of value that have lagged the recovery so far.

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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