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Fixed Income

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

  • 04 May 2021
  • 5 min read

Key points

  • Sterling credit spreads slightly widened in March
  • Higher US treasury yields and renewed concerns about the pandemic put pressure on risk assets
  • The risk profile was broadly unchanged

What’s happening?

Credit spreads widened slightly in March 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 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.

UK gilt yields rose slightly supported by the country’s very successful vaccination programme and improved economic outlook, with the Bank of England leaving policy unchanged.

Portfolio positioning and performance

Despite sterling investment grade primary issuance jumping to £8.3bn in March, the most since June 2020, we did not participate in any new issues. However, we added a new exposure to UK retailer Marks & Spencer in the secondary market. As such, our exposure to BBB rated bonds was stable at 51%.

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.

While we aim to remain overweight in BBB rated bonds in order to optimise the carry of the portfolio, we also plan to gradually reduce this overweight over the coming months as valuations have become very expensive.

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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