Fixed Income

Global Strategic Bonds strategy - Markets price in good news on the recovery

  • 08 July 2020
  • 10 min read

Key points

  • Central bank support appears to have suppressed volatility in government bond yields
  • Risk assets remain relatively volatile, but continue to move higher
  • Downside risks are clear, with macro and political uncertainties ahead

What’s happening?

Another strong month for risk assets as lockdown restrictions are eased and economic data starts to improve from dire levels.

Despite better returns from risk assets, government bond yields remain robust, thanks to technical demand.

The virus data in some US states started to deteriorate towards month-end but, for now, markets are broadly ignoring the concerns.

US 10-year yields are stuck in a very low trading range as central banks have reduced volatility in high quality bonds.

Portfolio positioning and performance

Defensive (43%): re-implemented higher duration exposure with an increase of 2 years. New inflows were put into higher quality government bonds. We continue to prefer US treasuries over their European equivalents. Our exposure to long-dated France performed very well.

Intermediate (24%): we increased exposure to European credit during the month. New issues continue to provide attractive opportunities, with a specific focus on financials.

Aggressive (33%): whilst continuing to build positions in high yield and emerging markets, we have been active on our CDS protection by taking profit from strong gains over last few months, as markets have priced a lot of good news on the economic recovery, whilst also being mindful of further volatility ahead.

Outlook

Markets continue to focus on the economic recovery and central bank stimulus, rather than any medium-term economic pain inflicted by the global lockdown. Economic data has generally surprised to the upside and, in tandem with the loosening of lockdown restrictions, there is more positive sentiment in the short term.

Whilst government bond volatility appears to have supressed, risk assets show some signs of volatility yet have continued to move higher over the month. As well as central bank stimulus, it appears that high levels of cash continue to move in from the side-lines to support asset prices.

This is supportive of higher valuations but we maintain vigilance and moderate our bullishness accordingly.

No assurance can be given that the Global Strategic Bonds strategy will be successful. Investors can lose some or all of their capital invested. The Global Strategic Bonds strategy is subject to risks including credit risk, operational risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets, global investment grade and high yield securities, securitised assets and collateralised debt risks.

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