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Global Strategic Bonds strategy: Government bond volatility falls, credit spreads reverse

  • 08 October 2020 (5 min read)

Key points

  • Government bond yields trading in very tight range as we look for cheaper entry points
  • Tough month for risk assets as we increase the CDS hedge on our high yield exposure
  • Upcoming US election and worsening virus data could increase volatility and therefore create opportunities to add risk

What’s happening?

Government bonds continue to trade in a very tight range, with yields very low as central banks appear to have suppressed volatility in high quality bonds.

Risk assets had a tougher month as spreads took their lead from a small equity-led technology sell-off.

Whilst economic data points towards a global economic recovery after the severe drawback in Q1 and Q2, the virus data shows growing concerns around a pick-up in cases in Europe and subsequent government restrictions.

Portfolio positioning and performance

Defensive (42%): we continue to run a duration exposure below 3 years as we look for cheaper entry points. Exposure to high quality bonds is focused in short and medium-dated assets, with a bias towards US assets, despite their underperformance versus their European equivalents during the month. Our position in long-dated France had a very strong return during the month.

Intermediate (24%): a flat month for better quality credit as gains from duration exposure were offset by wider credit spreads. We prefer European credit, specifically exposure to UK-related financial services names. Our overall credit exposure has a strong bias towards BBB assets.

Aggressive (35%): asset allocation activity was limited during the month as we continue to prefer US high yield exposure (17%), including 7% in lowest rated, highest yielding CCC bonds. US high yield exposure was somewhat justified with another outperformance versus emerging market exposure (12%) during the month. We added to our CDS index hedge in high yield during the month.


Year-to-date returns have consolidated in the last few months as government bond volatility dropped significantly and credit spreads reversed during September, following a couple of strong months.

The upcoming US presidential election, along with increasingly worrying virus data, presents a possible pick-up in volatility and thereby opportunities to add more risk.

For the foreseeable future we continue to prefer short duration and mildly long risk assets with some “insurance policy” portfolio hedges in place, looking to benefit from cheaper entry points.

No assurance can be given that the Global Strategic Bonds strategy will be successful. Investors can lose some or all of their capital invested. The Global Strategic Bonds strategy is subject to risks including credit risk, operational risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets, global investment grade and high yield securities, securitised assets and collateralised debt risks.

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