Global Short Duration strategy - May 2021
Markets await the next catalyst
- Credit spreads were broadly unchanged in May as markets await the next catalyst
- The US Federal Reserve continues to see the sharp rise in inflation as ‘transitory’
- The risk profile was further reduced
Credit spreads widened in the first part of the month due to concerns about rising inflation, with the annual rate in the US leaping to a more than 12-year high in April, and the possibility that central banks, particularly the US Federal Reserve (Fed), would start to tighten monetary policy sooner than expected.
However, investors appeared to shrug off these concerns later in the month as Fed officials sought to assuage market fears about the timing of interest rate increases. Meanwhile, the European Central Bank kept interest rates on hold and insisted it was also too soon to talk about any changes to monetary policy, easing concerns about a potential tightening.
US treasury and UK gilt yields slightly fell in May, anchored by ongoing support from central banks, while German bund yields slightly rose as the pace of COVID-19 vaccinations continued to increase in Europe.
Portfolio positioning and performance
Sovereign: In order to further de-risk the portfolio, we increased our sovereign exposure by another 6% to 17% by adding to short-dated US treasury inflation-linked bonds and, US and UK nominal bonds. We also further reduced the duration of the Fund, as successful vaccination programmes in most developed countries should lead to higher yields due to a faster and sustainable reopening of their economies.
Investment Grade: We slightly reduced our exposure to investment grade by 1% to 42% in order to reallocate towards sovereign debt. We were active in both primary and secondary markets, participating in several attractive new issues from financial companies.
High Yield and Emerging Markets: We decreased our exposure to high yield and emerging markets by 3% to 37% by reducing our exposure to US high yield and by selling expensive investment grade rated emerging markets names. We were active in both primary and secondary markets, adding several very short-dated bonds from European high yield issuers.
As we expect continued monetary and fiscal support over the medium term to ensure a full economic recovery, we believe 2021 will be all about carry.
While we aim to remain overweight in high yield and emerging markets in order to optimise the carry of the portfolio, we also plan to gradually reduce this overweight over the coming months as valuations have become very expensive, starting with emerging markets.
We expect yields to further rise as successful vaccination programmes in most developed countries should lead to a faster and sustainable reopening of their economies.
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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