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Sterling Credit Short Duration strategy: Higher sovereign yields put pressure on risk assets

  • 11 March 2021 (3 min read)

Key points

  • Credit spreads tightened despite sharply higher gilt yields
  • The risk profile was broadly unchanged
  • Despite higher yields, the Fund was broadly flat (-0.08%) in February

What’s happening?

Credit spreads tightened in the first half of the month, supported by the global rollout of coronavirus vaccines, strong corporate earnings results and plans for a $1.9trn fiscal stimulus in the US.

The Bank of England (BoE) monetary policy meeting was perceived as hawkish as it left interest rates and balance sheet policy unchanged while, for now, ruling out the use of negative interest rates.

UK gilt yields rose sharply, underperforming US treasuries and German bunds, due to a hawkish BoE, the successful UK vaccine rollout leading to the gradual reopening of the economy, and escalating concerns about inflation.

Portfolio positioning and performance

Sterling investment grade primary issuance was disappointing at £3.6bn, marking the slowest February since 2018. As such, we participated in only one new issue from First Abu Dhabi Bank. Following the successful UK and US vaccine rollouts, we added exposure to UK hospitality companies Whitbread and Intercontinental Hotels Group, both new additions to the Fund. As such, our exposure to BBB rated bonds was stable at 51%.


Following the continuation of very accommodative monetary policies, additional US fiscal stimulus, and the acceleration of the vaccine rollout globally, we are ready to look through some near-term risks and believe that 2021 will be all about carry. Therefore, we plan to remain overweight in BBB rated bonds while keeping the duration at the lower end of our historical range.

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