Global Short Duration strategy - May 2022
- 13 July 2022 (5 min read)
Volatile month as inflation reaches new highs
- Credit spreads continued to widen as inflation reached new highs in the eurozone and UK
- Government bond yields were mixed, with US treasuries outperforming
- We increased opportunistically our exposure to US high-yield
What’s happening?
Credit spreads widened in the first half of the month driven by concerns over central bank tightening, rampant inflation, and China’s zero-tolerance policy towards COVID-19. However, as the market dialed back expectations for interest rate rises in the US due to recession fears and China relaxed some of its COVID-19 restrictions, credit spreads tightened but still finished the month wider.
The US Federal Reserve (Fed) raised interest rates for a second consecutive time by 0.5% to the range of 0.75% to 1% in a bid to slow down inflation. Meanwhile the Bank of England raised interest rates for a fourth consecutive time from 0.75% to 1%, the highest in 13 years. Inflation rates in April reached a record high in the eurozone at 8.1% and a 40-year high in the UK at 9%.
German bund and UK gilt yields rose as the market focused on the impact of rising inflation on the future path of interest rates. Meanwhile, US treasury yields fell due to the prospect of potentially less aggressive hikes from the Fed as inflation slightly cooled to 8.3% in April from 8.5% in March and as recession fears increased.
Portfolio positioning and performance
Sovereign: Our exposure to sovereign bonds decreased by 2% to 12% as we sold some US treasuries to increase opportunistically our allocation to US high-yield towards the end of the month. We also switched out of nominal government debt into short-dated UK inflation-linked bonds at the beginning of the month as we remained invested in US and German inflation-linked bonds to profit from attractive inflation indexation over the next couple of months. We increased the duration of the portfolio to 2.7 years from 2.3 years to benefit from a higher level of carry.
Investment Grade: Our exposure to investment grade markets was broadly stable at 48% (versus 49% last month) as we were active in both primary and secondary markets across US dollar and sterling, with a bias towards the financial sector.
High Yield and Emerging Markets: Our exposure to high-yield and emerging markets increased by 4% to 39% as we added opportunistically to US high-yield towards the end of month following its sharp underperformance. We were also active in the euro high-yield primary market.
Outlook
We expect market conditions to remain very volatile over the medium-term due to the combination of continued inflationary pressures, hawkish central banks and a protracted conflict in Ukraine. In such an environment, it is paramount to retain flexibility and manage actively the duration and credit exposure.
As inflation should start gradually falling over the coming quarters, we expect yields to stabilise at these higher levels since they already reflect a very aggressive pace of tightening by central banks, helping credit spreads to tighten.
No assurance can be given that the Global Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Global Short Duration strategy is subject to risks including credit risk, liquidity risk and interest rate risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets and global investment 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 moreVisit our fund centre
The aim of the strategy is to provide income combined with any capital growth.
View fundsDisclaimer
Not for Retail distribution: This marketing communication is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This marketing communication does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this marketing communication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee that forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.
The products or strategies discussed in this marketing communication may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.
Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate, London EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.