Fixed Income

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

  • 13 August 2020
  • 7 min read

Key points

  • Credit spreads further tightened thanks to the continued monetary and fiscal support
  • Risk of a second coronavirus wave around the globe remains a key risk
  • We kept on selectively adding risk

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, UK gilt yields fell in July, mirroring a trend across developed markets, as they remained supported by central bank purchases.

Portfolio positioning and performance

We were active in July in the secondary market, buying UK student accommodation company Student Finance and UK transportation company Go-Ahead, the latter being a new addition to the Fund. We did not buy any new issues in July as the sterling primary market took an early holiday with only £1.3 billion of issuance. Since the end of February, we have gradually re-risked the portfolio adding 4% of BBB rated bonds (to 49% from 45%) and 3% of cyclical names (to 25% from 22%).

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 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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