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Global Short Duration strategy - March 2022

  • 22 April 2022 (5 min read)

Yields sharply rise on hopes of progress in peace talks

  • Despite continued hawkishness from central banks and the ongoing Russian invasion of Ukraine, credit spreads tightened supported by hopes of progress in peace talks
  • Government bond yields were again volatile, ending the month significantly higher
  • We continued to re-risk the portfolio by mostly increasing our exposure to high-yield and emerging markets

What’s happening?

Despite continued hawkishness from central banks and the ongoing Russian invasion of Ukraine, credit spreads tightened supported by better-than-expected economic releases and hopes of progress in peace talks.

The US Federal Reserve (Fed) raised interest rates by 0.25% to 0.25%-0.50% in a widely anticipated move as Fed chairman Jerome Powell pledged to ‘restore price stability’. The European Central Bank surprised market participants on the hawkish side with the announcement of an acceleration of its tapering program while the Bank of England increased interest rates for the third consecutive time by 0.25% to 0.75%.

US treasury, German bund, and UK gilt yields sharply rose to levels not seen since before the pandemic as the market focused on the inflationary impact of the war and as peace talks progressed.

Portfolio positioning and performance

Sovereign: Our exposure to sovereign bonds further decreased by 7% to 13% as we continued to re-risk the portfolio. We sold our French inflation-linked bonds following their strong performance but kept our exposure to shorter-dated US and German inflation-linked bonds broadly stable, with our overall inflation exposure falling by 5% to 8%. We also continued to reduce our exposure to nominal government bonds by 2% to 5%. The duration was actively managed during the month as we successfully benefited from the high level of volatility.

Investment Grade: Our exposure to investment grade markets further increased by 2% to 48% to benefit from wider credit spreads. We were mostly active in the sterling primary market to capture attractive new issue premia, with a bias towards the banking sector.

High Yield and Emerging Markets: Our exposure to high-yield and emerging markets further increased by 7% to 38% as we increased our allocation to European high-yield and emerging markets to benefit from wider credit spreads. We were mostly active in the secondary market as new issues were very scarce during the month.

Outlook

We continued to re-risk the portfolio in March to benefit from the strong market sell-off in the first half of the month. With spreads having tightened back again, we have paused for now the re-risking waiting for better entry points.

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

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