Global Short Duration strategy - April 2022

Market sell-off deepens as growth outlook deteriorates

• Credit spreads widened as still-rising inflation should lead to aggressive monetary policy tightening by central banks
• Government bond yields surged, reaching levels not seen since before the pandemic
• We reduced our exposure to high-yield

What’s happening?

Cedit spreads widened as still-rising inflation should lead to aggressive monetary policy tightening by central banks, sparking investor concerns. A mixed bag of earnings reports and economic data, combined with continued disruption to supply chains and the ongoing conflict in Ukraine, all weighed further on sentiment. The French election result brought little relief to markets.

The European Central Bank (ECB) surprised investors on the hawkish side. Despite making no changes to interest rates, policymakers indicated the first rate rise could be seen in July and as many as three hikes in total could happen this year. The ECB also confirmed its bond-buying programme will end in the third quarter.

US treasury, German bund, and UK gilt yields surged as investors focused on the impact of rising inflation and increasing interest rates. Yields on 10-year government bonds are now at levels not seen since 2015 for Germany and the UK, and 2018 for the US.

Portfolio positioning and performance

Sovereign: Our exposure to sovereign bonds was broadly stable at 14% (versus 13% last month) as we remained invested in US and German inflation-linked bonds, nominal US treasuries, and government guaranteed debt. We increased the duration of the portfolio to 2.3 years from 2 years to benefit from a higher level of carry as government bond yields further surged. 

Investment Grade: Our exposure to investment grade markets was also broadly stable at 49% (versus 48% last month) as we participated in only one sterling new issue and were also active in the sterling secondary market. 

High Yield and Emerging Markets: Our exposure to high-yield and emerging markets decreased by 3% to 35% as a combination of bond redemptions, upgrades to investment grade, and sales led to a reduction of our allocation to high yield.

Outlook

Following the sharp tightening of credit spreads in the second half of March, we reduced our exposure to high-yield, waiting for better entry points to start re- risking again the portfolio.

We expect market conditions to remain very volatile over the medium-term due to the combination of continued inflationary pressures, hawkish central banks, protracted conflict in Ukraine, and increased likelihood of a recession next year. In such an environment, it is paramount to retain flexibility and manage actively the duration and credit exposure.

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.