Global Short Duration strategy - February 2022

Market sell-off deepens as Russia invades Ukraine

• Credit spreads significantly widened due to the continued hawkishness from central banks and Russia’s invasion of Ukraine
• Government bond yields were volatile, ending February higher despite a late month rally
• We re-risked the portfolio by mostly increasing our allocation to investment grade markets

What’s happening?

Credit spreads significantly widened due to the continued hawkishness from central banks and Russia’s full-scale invasion of Ukraine. This led to a range of sanctions from the West in a bid to cut off Russia from financial markets and hobble its economy. As a result, oil prices spiked above $100 a barrel to a seven-year high, further adding to inflationary pressures.

The European Central Bank kept its monetary policy unchanged but president Christine Lagarde delivered a hawkish press conference, highlighting unanimous concern about inflation. Meanwhile, the Bank of England raised the bank rate by 0.25% to 0.50%, the first back-to-back hike since 2004, with four members even voting for a 0.50% increase. Inflation rates hit a new record high in January in the eurozone at 5.1%¹ and a three and four decades high in the UK and US at 5.5%¹ and 7.5%¹ , respectively.

US treasury, German bund, and UK gilt yields rose sharply in the first half of the month due to the continued hawkishness from central banks before falling in the second half as worries over a potential invasion of Ukraine by Russia increased.

Portfolio positioning and performance

Sovereign: Our exposure to sovereign bonds decreased by 11% to 20% as we mostly reduced our exposure to UK gilts and sterling-denominated government guaranteed debt to re-risk the portfolio. We kept our exposure to US, German, and French inflation-linked bonds broadly stable at 13% to benefit from attractive inflation indexation over the next couple of months. The duration was actively managed during the month and as the risk of an armed conflict between Russia and Ukraine increased, we kept it towards the top of our range at 2.3 years near the end of the month.

Investment Grade: Our exposure to investment grade markets increased by 8% to 46% to benefit from wider credit spreads. We were mostly active in the sterling secondary market, adding to attractive opportunities in the financial and cyclical sectors.

High Yield and Emerging Markets: Our exposure to high-yield and emerging markets also rose by 2% to 31% as we increased our allocation to European high-yield to benefit from wider credit spreads, buying attractive names in the secondary market. We also actively traded the Markit iTraxx Xover Index during the month to take advantage of the heightened level of volatility.

Outlook

We re-risked the portfolio in February to benefit from the broad market sell-off and should spreads keep on widening we stand ready to further increase our allocation to riskier asset classes out of sovereign debt.

While we still expect to see higher yields in 2022 due to continued inflationary pressures, Russia’s invasion of Ukraine has led to a much more volatile environment hence the importance to keep on managing actively the duration.