Sterling Credit Short Duration strategy - April 2022
Market sell-off deepens as growth outlook deteriorates
- Sterling credit spreads widened as still-rising inflation should lead to aggressive monetary policy tightening by central banks
- UK gilt yields surged, to levels not seen since 2015
- Our risk profile was stable
Sterling credit spreads widened as still-rising inflation should lead to aggressive monetary policy tightening by central banks, sparking investor concerns. A mixed bag of earnings reports and economic data, combined with continued disruption to supply chains and the ongoing conflict in Ukraine, all weighed further on sentiment. The French election result brought little relief to markets.
The European Central Bank (ECB) surprised investors on the hawkish side. Despite making no changes to interest rates, policymakers indicated the first rate rise could be seen in July and as many as three hikes in total could happen this year. The ECB also confirmed its bond-buying programme will end in the third quarter.
UK gilt yields surged to levels not seen since 2015 as investors focused on the impact of rising inflation and increasing interest rates. The UK’s annual rate of inflation continued to surge in March, hitting a 30-year high of 7%, from 6.2% the previous month.
Portfolio positioning and performance
Despite a very challenging market backdrop, sterling investment grade primary issuance was resilient at £5.6bn. As such, we bought the new issue for German carmaker VW, and we were also active in the secondary market buying the UK student accommodation securitisation from Student Finance. As activity was overall limited this month, our exposure to BBB-rated names was broadly stable at 54% (versus 53% last month) while our exposure to sovereign debt was unchanged at 4%.
We expect market conditions to remain very volatile over the medium-term due to the combination of continued inflationary pressures, hawkish central banks, protracted conflict in Ukraine and increased likelihood of a recession next year.
As such, we have paused for now the re-risking of the portfolio waiting for better entry points.
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.