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Fixed Income

Global Short Duration strategy: Higher US treasury yields put pressure on risk assets

  • 04 May 2021
  • 5 min read

Key points

  • Spread performance was mixed with high yield outperforming
  • Higher US treasury yields and renewed concerns about the pandemic put pressure on risk assets
  • The risk profile was reduced

What’s happening?

Spread performance was mixed as the continued support from central banks, the improved global economic outlook, and progress in the roll-out of coronavirus vaccinations (despite supply issues) were offset by sharply higher US treasury yields and renewed concerns about the pandemic, particularly as Europe battled a third wave of infections.

The US Federal Reserve (Fed) reassured markets about an early tightening of monetary policy by suggesting that no interest rate hikes were likely before 2024. Meanwhile, the European Central Bank announced it would raise the rate of its monthly bond purchasing under its Pandemic Emergency Purchasing Programme to counter the recent rise in yields.

US treasury yields rose sharply on the back of an upbeat economic outlook from the Fed and the country’s very successful vaccination programme. US treasuries significantly underperformed UK gilts and German bunds, with the latter even heading slightly further into negative yield territory following lockdown extensions in Europe.

Portfolio positioning and performance

Sovereign: We doubled our sovereign exposure during the month by adding very short-dated government guaranteed debt, with the remaining invested in short-dated US treasury inflation-linked bonds.

Investment Grade: We kept our exposure to investment grade stable. We were still active in both primary and secondary markets as we continued to reduce our exposure to expensive names.

High Yield and Emerging Markets: We started to gradually reduce our exposure to high yield and emerging markets during the month, focusing on the latter as the asset class faces the headwinds of higher US treasury yields and weaker sentiment. This meant that our exposure to high yield and emerging markets peaked last month at 43%.

Outlook

As we expect continued monetary and fiscal support over the medium term to ensure a full economic recovery, we believe 2021 will be all about carry.

We aim to remain overweight in high yield and emerging markets in order to optimise the carry of the portfolio. However, due to valuations having become very expensive, we also plan to gradually reduce this overweight over the coming months, starting with emerging markets as the asset class should be directly pressured by higher US treasury yields.

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

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