Sterling Credit Short Duration strategy - July 2022
Market rebound fuelled by hopes of less aggressive tightening
- Sterling investment grade credit spreads tightened on the back of hopes of a slower pace of interest rate increases in the US going forward
- UK gilt yields were lower, being also supported by renewed recession talks
- The risk profile was broadly unchanged
Sterling investment grade credit spreads tightened in July on the back of positive corporate earnings and hopes that the US Federal Reserve (Fed) would slow down its aggressive tightening of monetary policy in the face of a surprise fall in GDP, which pushed the US into a technical recession.
The Fed raised interest rates for a fourth consecutive time by 0.75% to the range of 2.25% to 2.50% as it remained steadfast in its decision to tame inflation. However, Fed chairman Jerome Powell said that a slower pace of increases will be likely “while we assess how our cumulative policy adjustments are affecting the economy and inflation”. Meanwhile, the European Central Bank raised interest rates for the first time in more than 11 years by 0.50% to 0.00% as it tried to control soaring inflation.
Despite inflation numbers accelerating once again, UK gilt yields fell due to hopes of a slower pace of interest rate increases in the US going forward and renewed recession talks.
Portfolio positioning and performance
Sterling investment grade primary issuance remained weak at £1.9bn in July. As such, we did not participate in any new issues and secondary market activity was limited. We kept therefore the positioning broadly stable with our exposure to the financial sector and BBB-rated bonds unchanged at 43% and 57% respectively.
We expect market conditions to remain very volatile over the short-term due to continued inflationary pressures, hawkish central banks, a protracted conflict in Ukraine and increased risk of a recession next year.
As inflation should start gradually falling over the coming quarters, we expect yields to consolidate at these higher levels since they already reflect a very aggressive pace of tightening by central banks, helping credit spreads to also stabilise.
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.
What are short duration bonds?
A short duration bond is generally a bond with a short time to maturity. At AXA IM we define this period as 5 years or less.Find out more