Global Short Duration strategy - April 2024

What’s happening?

Credit spreads tightened further, supported by dovish central banks, resilient economic data, and continued strong demand. A surprise interest rate cut from Switzerland’s central bank confirmed that other central banks would not necessarily wait for the US Federal Reserve (Fed) to start cutting first.

The Fed left interest rates unchanged at a range of 5.25-5.5% and held onto its outlook for three cuts this year despite higher-than-expected inflation. As expected, the European Central Bank (ECB) also kept all its policy rates unchanged, with the depo rate remaining at 4% and the first cut still expected in June. Similarly, the Bank of England (BoE) left interest rates unchanged at 5.25%, with no members of the rate setting committee voting for a rate rise for the first time since 2021. Meanwhile, Japan made the historic decision to end its era of negative interest rates with its first rate rise in 17 years.

Sovereign yields fell on the back of dovish central banks. UK gilts outperformed US treasuries and German bunds as UK inflation surprised on the downside, falling to 3.4% in in the year to February, its lowest level for two and half years. Meanwhile, US inflation unexpectedly rose to 3.2% from 3.1% in January while eurozone inflation also surprised on the upside at 2.6%.

Portfolio positioning and performance

Sovereign: Our exposure to sovereign bonds was broadly stable at 24% as we switched some nominal debt into US treasury inflation-linked bonds due to stickier-than-expected inflation on the back of strong economic data. We remained invested in German bunds, UK gilts, and government-related debt. We increased the duration from mid-month, with a bias towards euro and sterling duration, enabling us to benefit from the fall in sovereign yields.

Investment Grade: Our exposure to investment grade markets was also largely unchanged at 57% as we continued to be active in the euro and sterling primary markets. We were also active in secondary markets.

High-Yield and Emerging Markets: Our exposure to high-yield and emerging markets decreased further to 16% as we increased our underweight position due to increasingly expensive valuations.

Outlook

A divergence in monetary policy between Europe and the US could appear this year as the latter is faced with stickier inflation on the back of much stronger growth, potentially preventing the Fed from cutting rates not nearly as much as the ECB or BoE.

We have reduced the overall level of credit risk as valuations look fair to expensive across most asset classes, particularly in a scenario where the Fed would not cut rates at all in 2024.

Still, we believe the yields available on short-dated bonds remain attractive due to inverted sovereign yield curves and flat credit curves.

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.