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Global Short Duration strategy: The rally stalls

  • 14 October 2020 (5 min read)

Key points

  • Credit spreads widened for the first time since March
  • A sharp increase in coronavirus infections led to the re-imposition of local lockdown restrictions
  • We kept the risk profile broadly stable

What’s happening?

For the first time since March, credit spreads widened in September, due to several factors: a sharp increase in coronavirus infections, particularly in Europe, and the subsequent re-imposition of local lockdown restrictions; a lack of agreement on further fiscal spending in the US; and heightened risk of a ‘no-deal’ Brexit as tensions between the UK and the European Union increased.

At its September policy meeting, the US Federal Reserve projected that its ultra-low interest rate policy would likely remain in place until the end of 2023. Meanwhile, the European Central Bank assured markets that its current accommodative monetary strategy would remain in place; and the Bank of England said that, although it was exploring negative interest rates, it would not impose them in the near future.

US treasury, German bund and UK gilt yields fell in September as coronavirus case numbers continued to rise, threatening the global economic recovery.

Portfolio positioning and performance

Sovereign: We remained invested in short-dated US treasury inflation-linked bonds due to attractive valuations.

Investment Grade: We continued to gradually reduce our bias towards investment grade in the Fund, favouring high yield and emerging markets. We were still active in primary and secondary markets.

High Yield and Emerging Markets: Despite reducing our exposure to US high yield ahead of the US elections, we slightly increased our overall exposure to high yield and emerging markets. Through this period, we remained active in primary markets, participating in several European high yield and emerging markets new issues. Due to the gradual re-risking undertaken since late March, we now have a 35% allocation to high yield and emerging markets - up from 19% at the end of February.


With the world’s economy not experiencing a ‘V-shaped’ recovery in our opinion but rather a ‘swoosh’ one, policy and fiscal support remain paramount.

As such, with valuations back to early March levels, we pause for now the re-risking of the Fund as the outlook remains uncertain with a potentially contested US election, renewed widespread local lockdowns to contain the second wave of coronavirus, and heightened ‘no-deal’ Brexit risk.

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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