AXA Global Strategic Bond Fund - November 2021
- 21 December 2021 (5 min read)
Fed changes tune on “transitory” inflation
- Credit spreads were wider towards month-end following emergence of the Omicron variant
- Fed Chair Powell claimed that “transitory” was no longer appropriate in relation to inflation
- We added duration and implemented a credit hedge as volatility could increase into year-end
What’s happening?
November was dominated by the emergence of a new Covid variant, subsequently named Omicron, renewing fears around both the sanitary situation and the economic recovery, whilst driving risk assets weaker and government bond yields lower. Credit spreads widened sharply at month-end, with high yield underperforming.
Away from Covid, the Fed distanced itself from the word “transitory” in relation to ongoing high levels of inflation and moved closer to interest rate rises, which are now priced in for the second half of 2022.
The Bank of England surprised the market with no action after markets priced in higher yields. UK gilts continue to be more volatile compared with US or German bonds.
Portfolio positioning and performance
Defensive (28%): we added UK and US duration risk towards month-end as bond yields moved lower on risk aversion. However, we reduced our bias towards longer-dated assets as the US treasury curve has flattened significantly this year.
Intermediate (34%): activity was relatively quiet in high quality credit with a continued positioning bias towards euro and sterling BBB-rated assets. During the month, we added more exposure to the UK financial services sector via a new issue from an existing name, following a bond tender offer on our previous holding.
Aggressive (39%): slight increase to US high yield over the month as market momentum was positive until the Covid-related volatility towards month-end. We continue to prefer shorter-dated, lower-rated names. Smaller issue sizes have generated decent performance recently.
Outlook
Government bonds have failed all year to push as high as many would have expected given such negative macroeconomic data. Once more it looks like structural, possibly less price sensitive, demand is still strong and supportive to core yields, albeit they are higher than earlier in 2021.
An increase in uncertainty around Covid variants presents itself as a renewed risk to the market for the turn of the year. With this in mind, we have added duration and a credit risk hedge as market volumes are expected to be thin at year-end.
2022 will presumably have to contend with the twin forces of increasingly hawkish central banks alongside some well flagged tail risks, pointing towards a pick-up in volatility for an asset class that offers low yields after such huge monetary stimulus, hence some caution seems appropriate.
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The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.