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Fixed Income

Global Short Duration strategy - October 2021

  • 12 November 2021
  • 5min read

The yield curve flattens as the front-end underperforms

  • Credit spreads were mixed due to continued worries about inflation and policy tightening
  • Government bond yields rose, with the front-end underperforming
  • We continued to add to short dated inflation-linked bonds

What’s happening?

Despite positive corporate results, credit spreads were mixed in October due to continued worries about inflation, with oil prices soaring to multi-year highs, and the prospect of imminent monetary policy tightening.

The US Federal Reserve signalled that it could start ‘tapering’ its asset purchases in November, with a view to ending the programme by mid-2022, while the European Central Bank maintained its accommodative policy stance, emphasising the fragility of the economic recovery and temporary factors driving up inflation.

US treasury, German Bund and UK gilt yields rose in October, with the front-end underperforming, due to the prospect of looming policy tightening as illustrated by Bank of England officials hinting about the possibility of an imminent interest rate hike.

Portfolio positioning and performance

Sovereign: Our overall sovereign exposure remained stable at 30% as we switched out of nominal bonds into German and French inflation-linked bonds, early in the month, to benefit from supportive inflation indexation into year-end. As a result, our exposure to inflation-linked bonds increased by 8% to 15%.

Investment Grade: Our exposure to investment grade markets was broadly constant at 32% (vs. 33% last month) as several bonds matured and we reinvested some of the proceeds in the sterling market to benefit from attractive yields.

High Yield and Emerging Markets: While our exposure to high yield (HY) and emerging markets (EM) remained stable at 36%, we participated in an attractive new HY issue and sold protection on the Markit iTraxx Xover to unwind our position following improving market sentiment in the latter part of the month.

Outlook

With valuations remaining very expensive and inflationary pressures persisting, we plan to retain our barbell strategy by keeping a higher exposure to sovereign bonds (and linkers) for defensiveness purposes and HY / EM to optimise carry, while keeping a lower exposure to investment grade markets.

We continue to expect higher yields by the end of the year as the impact of the pandemic on the global economy keeps on receding and inflationary pressures continue.

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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