Sterling Credit Short Duration strategy: Hopes of additional US fiscal stimulus support spread performance
- Credit spreads continued to tighten, supported by hopes of additional US fiscal stimulus
- Slow start of the vaccine rollouts weighed on sentiment
- The risk profile was broadly unchanged
Despite concerns around the slow pace of coronavirus vaccine rollouts and the spread of new, more infectious strains, credit spreads still tightened. This was supported by hopes of additional US fiscal stimulus after the Democrats won control of the Senate, and some solid corporate results.
The US Federal Reserve left interest rates and balance sheet policy unchanged while dismissing questions on tapering as ‘premature’. The European Central Bank policy meeting was also uneventful, with all policy levers left unchanged.
UK gilt yields rose in January, driven by higher US treasury yields, due to hopes of further US fiscal stimulus.
Portfolio positioning and performance
Despite sterling investment grade primary issuance standing at £5.5bn in January, we did not participate in any new issues as we continued to gradually reduce our exposure to cyclical names due to expensive valuations. As such, our exposure to BBB rated bonds also fell from 53% to 51% over the last month.
Monetary and fiscal support remain paramount to help cushion the economic damage caused by the new round of lockdowns.
Following hopes of additional US fiscal stimulus and the expected 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 in order to optimise the level of carry within the portfolio.
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.