Fixed Income

Sterling Credit Short Duration strategy - The rally goes on

  • 12 June 2020
  • 5 min read

Key points

  • Credit spreads have continued to tighten following the gradual easing of lockdown restrictions
  • Short-dated gilt yields dropped below zero for the first time ever
  • We have continued to selectively add risk

What’s happening?

Credit spreads have continued to tighten in May following the gradual easing of lockdown restrictions, and further stimulus from central banks and governments worldwide, including the Franco-German proposal for an EU recovery fund - each of these factors lifting hopes for a recovery in economic activity.

However, renewed tensions between the US and China simmered throughout the month, unsettling markets at times.

Gilt yields further fell in May, with yields on short-dated gilts dropping below zero for the first time ever, partly due to increased speculations that the Bank of England could push interest rates below zero.

Portfolio positioning and performance

We were active in May, participating in some new issues in sterling, as supply saw its first uptick since the relief rally began with gross issuance of £7.7bn. As such, we participated in the new issues from German conglomerate Siemens and UK bank RBS, the former being a new addition to the Fund.

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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