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Sterling Credit Short Duration strategy - December 2021

  • 17 January 2022 (5 min read)

Market rallies on limited Omicron impact

  • Sterling investment grade credit spreads tightened as it became increasingly clear that the impact of Omicron would not be as severe as initially feared
  • UK gilt yields rose as central banks were increasingly hawkish, with the Bank of England hiking rates by 0.15%
  • We continued to decrease our exposure to BBB-rated bonds

What’s happening?

Despite several countries introducing tighter restrictions to try and limit the spread of Omicron, credit spreads still tightened as fears about its potency and ability to evade vaccines gradually dissipated and investors began to believe that its economic effects would be relatively short-lived.

The US Federal Reserve (Fed) said it would bring forward plans to end its asset-purchasing scheme by March, to open the way for earlier interest rate increases, as it projected three hikes in 2022. Meanwhile, the European Central Bank said it would also halt its emergency asset-buying programme in March but would expand its bond purchases under an older scheme. Finally, the Bank of England surprised the market by raising interest rates for the first time in three years by 0.15%, as it sought to tame inflation.

UK gilt yields rose, along with yields on US treasuries and German bunds, as central banks were increasingly hawkish to counter sharp rises in inflation.

Portfolio positioning and performance

We did not participate in any new issues in December as the sterling investment grade primary issuance was only £0.5bn. We were still active in the sterling and euro secondary markets buying bonds, for example, from UK utility company Anglian Water and French-Italian carmaker Stellantis. Our exposure to BBB-rated bonds decreased by 2% to 45% while our exposure to sovereign debt was stable at 10%. 

Outlook

With the market having to grapple with expensive valuations and a hawkish Fed, we plan to continue reducing our exposure to BBB-rated bonds over the coming months.

We also plan to keep the duration at the lows, close to 1.5 years, as we expect to see higher yields in 2022 due to continued inflationary pressures and receding Omicron uncertainties.

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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