Fixed Income

Sterling Credit Short Duration strategy Strong rebound following unprecedented central bank stimulus

  • 22 May 2020
  • 10min read

Key points:

  • Credit spreads tightened on the back of unprecedented global central banks stimulus and…
  • … despite historically weak economic data releases
  • We keep on selectively adding risk

What’s happening?

Despite historically weak economic data releases, credit spreads significantly tightened in April driven by the unprecedented accommodative monetary support from global central banks, a slowdown in new coronavirus cases and the lifting of lockdown measures in some countries towards month-end.

The US Federal Reserve continued its policy support, as it implemented a new loan programme worth up to $2.3 trillion, while stating that it would do whatever was necessary to back the economy. The European Central Bank announced an extension to its record-low interest rate loan facilities to banks, while maintaining its €750 billion bond-buying programme.

Despite this risk-on environment and the UK significantly increasing its borrowing in the next three months to pay for the sizeable measures put in place to support the economy, UK gilt yields still fell as the Bank of England stepped up its gilt purchases.

Portfolio positioning and performance

Activity was somewhat subdued in April after a very busy March, as we didn’t participate in any new issues. We added a new position in the secondary market, buying UK reinsurer Society of Lloyds, while starting to gradually reduce our exposure to European peripheral names that had recently outperformed.

Outlook

While the outlook remains uncertain despite unprecedented fiscal and monetary support globally, the widening of spreads since late February has made us more positive on risk assets. Should the coronavirus outbreak stabilise and/or spreads widened further, we will look to keep on gradually adding to cyclical and subordinated financial names by reducing our allocation to defensive sectors.

For the first time since 2008, the short-dated sterling corporate bond market yields almost as much as the all-maturity one and, as such, we believe this represents a very attractive entry point for investing in short-dated bonds.

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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