Sterling Credit Short Duration strategy - November 2021
Double headwind of Omicron and a hawkish Fed
- Sterling investment grade credit spreads were wider due to the double headwind of Omicron and a hawkish Fed
- Gilt yields fell due to Omicron related uncertainties
- The risk profile was broadly unchanged
Despite positive corporate results and strong US economic data, credit spreads widened due to a hawkish US Federal Reserve (Fed), the reintroduction of COVID-19-related restrictions in some countries, and the new, highly-mutated Omicron variant that could be more transmissible and resistant to existing vaccines.
The Fed confirmed plans to start scaling back its asset-purchase programme from November while Fed chairman Jerome Powell indicated that the speed of tapering could be accelerated because of persistently high inflation. Meanwhile, the Bank of England (BoE) signalled that an interest rate hike would be likely ‘over the coming months’ but surprised the market by leaving the Bank rate unchanged in November.
UK gilt yields fell on the back of Omicron-related uncertainties and a more dovish than expected BoE.
Portfolio positioning and performance
Sterling investment grade primary issuance posted a solid £3.8bn in November as we participated in the new issues from German and Norwegian banks Commerzbank and DNB. We were also active in the secondary market buying bonds, for example, from Spanish toll road operator Abertis and UK utility company Anglian Water. Our exposure to BBB-rated bonds remained broadly unchanged at 47% versus 46% last month, while our exposure to sovereign debt increased by 2% to 10%.
With the market having to grapple with expensive valuations, a more hawkish Fed due to persistently high inflation, and Omicron-related uncertainties, we plan to continue reducing our exposure to BBB rated bonds over the coming months.
We continue to expect higher yields by the end of the year as inflationary pressures continue and Omicron uncertainties recede.