Global Short Duration strategy - March 2024
- 04 April 2024 (3 min read)
Yields rise as investors dial back further the prospect of rate cuts
What’s happening?
Credit spreads tightened further, supported by positive corporate results, resilient economic data, and continued strong demand.
The Bank of England left interest rates unchanged at 5.25% in February as ‘monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term’. The US Federal Reserve and European Central Bank did not hold any policy meetings in February, with markets expecting the first rate cut to happen in June for both.
Sovereign yields rose as investors dialled back further the prospect of rate cuts for 2024. US and Eurozone inflation surprised on the upside in the year to January at 3.1% and 2.8%, respectively, while UK inflation surprised on the downside, remaining stable at 4%.
Portfolio positioning and performance
Sovereign: Our exposure to sovereign bonds increased by 2% to 25% as we initiated a new position on US treasury inflation-linked bonds following the US inflation upside surprise in January. We remained also invested in German bunds, UK gilts, and government related debt. The duration was actively managed throughout the month, enabling us to limit the negative impact from rising sovereign yields.
Investment Grade: Our exposure to investment grade markets was broadly stable at 56% as we continued to be active in the US dollar and euro primary markets. We were also active in secondary markets.
High-Yield and Emerging Markets: Our exposure to high-yield and emerging markets was also broadly unchanged at 18% as we maintained our underweight position due to expensive valuations.
Outlook
We expect market conditions to remain very volatile as the macroeconomic outlook continues to be uncertain given high interest rates, sticky inflation, slowing growth and tighter lending conditions.
As a result, we have reduced the overall level of credit risk as valuations look fair to expensive across most asset classes.
Still, we believe the yields available on short-dated bonds remain attractive due to inverted sovereign yield curves and flat to inverted 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.
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