Sterling Credit Short Duration strategy: The rally stalls
- 14 October 2020 (5 min read)
Key points
- Credit spreads widened for the first time since March
- A sharp increase in coronavirus infections led to the re-imposition of local lockdown restrictions
- We kept the risk profile broadly stable
What’s happening?
For the first time since March, credit spreads widened in September, due to several factors: a sharp increase in coronavirus infections, particularly in Europe, and the subsequent re-imposition of local lockdown restrictions; a lack of agreement on further fiscal spending in the US; and heightened risk of a ‘no-deal’ Brexit as tensions between the UK and the European Union increased.
At its September policy meeting, the US Federal Reserve projected that its ultra-low interest rate policy would likely remain in place until the end of 2023. Meanwhile, the European Central Bank assured markets that its current accommodative monetary strategy would remain in place; and the Bank of England said that, although it was exploring negative interest rates, it would not impose them in the near future.
UK gilt yields fell in September as coronavirus case numbers continued to rise, threatening the global economic recovery.
Portfolio positioning and performance
We were very active in September in the secondary market, buying bonds from French commercial real estate company Unibail and US media company Discovery, both being new additions to the Fund. Sterling investment grade primary issuance was light in September at only £6bn. We still participated in one new issue from Irish consumer credit reporting company Experian, also a new addition to the Fund. Since the end of February, we have gradually re-risked the portfolio, adding 5% of BBB rated bonds from 45% to 50%.
Outlook
With the world’s economy not experiencing a ‘V-shaped’ recovery in our opinion but rather a ‘swoosh’ one, policy and fiscal support remain paramount.
As such, with valuations back to early March levels, we pause for now the re-risking of the Fund as the outlook remains uncertain with a potentially contested US election, renewed widespread local lockdowns to contain the second wave of coronavirus, and heightened ‘no-deal’ Brexit risk.
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.
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