Fixed Income

Sterling Credit Short Duration strategy - The rally continues, but the risks around a second wave increase

  • 10 July 2020
  • 5 min read

Key points

  • Credit spreads further tightened following widespread easing of restrictions
  • The risks around a second wave increased
  • We kept on selectively adding risk

What’s happening?

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. The Bank of England also announced that it would increase the size of its bond-buying programme as it held interest rates at an all-time low.

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.

Portfolio positioning and performance

We were active in June, managing flows while participating in the new issue from UK bank Lloyds as sterling investment grade primary issuance reached £8.4 billion. Due to the gradual re-risking undertaken since March, we now have a 49% allocation to BBB rated bonds (from 45% at the end of February).

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 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.

No assurance can be given that the Sterling Credit Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Sterling Credit Short Duration strategy is subject to risks including credit risk, interest rate risk and counterparty risk. The strategy is also subject to derivatives and liquidity risks.

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