Sterling Credit Short Duration strategy - June 2021
‘Talking about talking about tapering’
- Credit spreads were tighter in June
- The US Federal Reserve started to talk about winding up asset purchases
- The risk profile was stable
- Credit spreads tightened in June as investors appeared to downplay plans by the US Federal Reserve (Fed) to start raising interest rates as early as 2023, and to shrug off worries about the global spread of the highly infectious Delta variant of COVID-19.
- Although interest rates were kept unchanged, Fed policymakers suggested that they could be raised twice in 2023, a year earlier than they had previously indicated. Policymakers also began to discuss winding up their asset-purchase scheme. Meanwhile, the European Central Bank opted for continuity, pledging to retain the asset purchases at a significantly higher pace while keeping interest rates unchanged.
- UK gilt yields fell in June as the Bank of England (BoE) policy meeting was perceived as dovish, with the BoE opting to leave the volume of its UK gilt purchases unchanged and to keep interest rates on hold.
Portfolio positioning and performance
- Despite sterling investment grade primary issuance being robust in June at £6.1bn, we did not participate in any new issues as most of the supply came from subordinated bank debt. Nonetheless, we slightly increased our exposure to sovereign and government guaranteed debt by another 1% to 7%, in order to further de-risk the portfolio, while keeping our exposure to BBB rated bonds stable at 49%.
- As we expect continued monetary and fiscal support over the medium term to ensure a full economic recovery, we believe the second half of 2021 will remain 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.
- We continue to expect higher yields by the end of the year as successful vaccination programmes in most developed countries should lead to a faster and sustainable reopening of their economies.
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.