Global Short Duration strategy - August 2021
Tapering talks intensify
- Investment grade credit spreads were broadly unchanged while high yield spreads were tighter
- Government bond yields rose as tapering talks intensified in the US and Europe
- The risk profile was broadly stable
Despite positive corporate results and the US Senate’s approval of a $1trn infrastructure bill, credit spreads were mixed in August. Concerns about the spread of the Delta variant of COVID-19 and signs of slowing economic growth in China continued to unsettle markets, while worries earlier in the month that the US Federal Reserve (Fed) was likely to begin tapering its monthly asset purchases before the end of the year added further pressure.
However, at the Fed’s annual Jackson Hole symposium, Chairman Jerome Powell sought to reassure investors by explaining that interest rate hikes were not imminent, even if tapering was, as there was still ‘much ground to cover’ before the economy hit full employment. Meanwhile, the Bank of England maintained its accommodative stance, although it indicated that it could start raising interest rates sooner than previously expected.
US treasury, German bund and UK gilt yields rose in August as tapering talks intensified in the US and Europe.
Portfolio positioning and performance
Sovereign: While our sovereign exposure remained stable at 28%, we decreased the duration of the portfolio from 1.8 years to 1.5 years as tapering talks intensified in the US and Europe.
Investment Grade: Our exposure to investment grade markets also remained unchanged at 35%. We were still active in the secondary market, adding to banks in US dollars.
High Yield and Emerging Markets: While our exposure to high yield and emerging markets also remained constant at 36%, we sold protection on the Markit iTraxx Xover in order to unwind our position as concerns around the Delta variant and Fed tapering somewhat abated during the month.
As we expect continued monetary and fiscal support over the medium term to ensure a full economic recovery, we believe the last quarter of 2021 will remain all about carry.
However, with valuations remaining very expensive, we plan to retain our barbell strategy by keeping a higher exposure to sovereign bonds and high yield and emerging markets, for defensiveness and carry purposes respectively, while keeping a lower exposure to investment grade markets.
We continue to expect higher yields by the end of the year as successful vaccination programmes in most developed countries should lead to a sustainable reopening of their economies.