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Sterling Credit Short Duration strategy - March 2022

  • 22 April 2022 (5 min read)

Yields sharply rise on hopes of progress in peace talks

  • Despite continued hawkishness from central banks and the ongoing Russian invasion of Ukraine, sterling credit spreads tightened supported by hopes of progress in peace talks
  • UK gilt yields were again volatile, ending the month significantly higher
  • We continued to re-risk the portfolio by mostly increasing our exposure to BBB-rated bonds

What’s happening?

Despite continued hawkishness from central banks and the ongoing Russian invasion of Ukraine, sterling credit spreads tightened supported by better-than-expected economic releases and hopes of progress in peace talks.

The US Federal Reserve (Fed) raised interest rates by 0.25% to 0.25%-0.50% in a widely anticipated move as Fed chairman Jerome Powell pledged to ‘restore price stability’ while the European Central Bank surprised market participants on the hawkish side with the announcement of an acceleration of its tapering program. The Bank of England increased interest rates for the third consecutive time by 0.25% to 0.75%, with one member voting to leave rates unchanged, a significant swing from last month when four members voted for a 0.5% hike.

UK gilt yields sharply rose to levels not seen since before the pandemic as the market focused on the inflationary impact of the war and as peace talks progressed.

Portfolio positioning and performance

Sterling investment grade primary issuance recovered in March at £6.6bn, with a clear bias towards financials as several non-domestic banks tapped the market. As such, we were very active in the sterling new issue market buying names such as US truck manufacturer Paccar, Norwegian bank DNB, and Canadian bank TD. We also participated in two new issues in euro and were very active in the sterling secondary market, mostly adding to attractive BBB-rated names in non-financial sectors. As a result, our exposure to BBB-rated names increased by 4% to 53% while our exposure to sovereign debt fell by 7% to 4%.

Outlook

We continued to re-risk the portfolio in March to benefit from the strong market sell-off in the first half of the month. With spreads having tightened back again, we have paused for now the re-risking waiting for better entry points.

Despite Russia’s invasion of Ukraine, we still expect to see higher yields in 2022 due to continued inflationary pressures and hawkishness from central banks.

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