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Fixed Income

Sterling Credit Short Duration strategy - May 2021

  • 22 June 2021
  • 5min read

Markets await the next catalyst

  • Credit spreads were broadly unchanged in May as markets await the next catalyst
  • The US Federal Reserve continues to see the sharp rise in inflation as ‘transitory’
  • The risk profile was further reduced

What’s happening?

Credit spreads widened in the first part of the month due to concerns about rising inflation,  with the annual rate in the US leaping to a more than 12-year high in April, and the possibility that central banks, particularly the US Federal Reserve (Fed), would start to tighten monetary policy sooner than expected.

However, investors appeared to shrug off these concerns later in the month as Fed officials sought to assuage market fears about the timing of interest rate increases. Meanwhile, the European Central Bank kept interest rates on hold and insisted it was also too soon to talk about any changes to monetary policy, easing concerns about a potential tightening.

UK gilt yields slightly fell in May, anchored by the ongoing support from the Bank of England, which kept interest rates on hold and left the volume of its asset purchases unchanged.

Portfolio positioning and performance

Sterling investment grade primary issuance was robust in May at £5.7bn, exactly in line with the year-to-date monthly average. We participated in the new issues from French bank BNP Paribas and Spanish bank CaixaBank. We were also active in the euro primary market, buying a new issue from UK bank Virgin Money. All names were new additions to the Fund. During the month, we increased our exposure to sovereign and government guaranteed debt by another 3% to 6%, in order to further de-risk the portfolio, while slightly increasing our exposure to BBB rated bonds by 1% to 49%. 

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.

We expect yields to further rise as successful vaccination programmes in most developed countries should lead to a faster and sustainable reopening of their economies.

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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