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Sterling Credit Short Duration strategy - April 2021

  • 02 June 2021 (5 min read)

Credit spreads tightened as government bond yields stabilised

  • Credit spreads were tighter, supported by the gradual reopening of economies and stable government bond yields
  • The US Federal Reserve (Fed) continued to dismiss talk about early tapering of quantitative easing
  • The risk profile was further reduced

What's happening?

Despite concerns about spikes in COVID-19 infections in a number of key countries, credit spreads still tightened, supported by the gradual reopening of economies, positive economic data, and strong earnings results.

The US Federal Reserve (Fed) left policy unchanged, reiterating that it would be ‘some time’ before ‘substantial further progress’ was made and tapering of quantitative easing began. The Fed also dismissed the rising inflation expected over the coming months as ‘transitory’. Meanwhile, the European Central Bank kept interest rates on hold and said it was too early to talk about tightening monetary policy.

Gilt yields were broadly unchanged as supportive monetary and fiscal policies and the very successful UK’s COVID-19 vaccination programme helped to anchor yields.

Portfolio positioning and performance

Despite sterling investment grade primary issuance being a robust £5.1bn in April, we did not participate in any new issues. We were still active in the secondary market, adding a new exposure to UK utility company Anglian Water. During the month, we reduced our exposure to BBB rated names by 3% to 48%, selling COVID-19-sensitive names that performed very strongly, and increased our exposure to sovereign and government-guaranteed debt by 2% to 3% in order to further de-risk the portfolio. 

Outlook 

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 BBB rated bonds 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.

No assurance can be given that the Sterling Credit Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Sterling Credit Short Duration strategy is subject to risks including credit risk, interest rate risk and counterparty risk. The strategy is also subject to derivatives and liquidity risks.

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Offer a first step onto the credit ladder with less uncertainty

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