Sterling Credit Short Duration strategy: The rally accelerates as risks substantially diminish
- 11 December 2020 (5 min read)
Key points
- Credit spreads significantly tightened thanks to the conclusive US elections and very positive vaccine news
- While coronavirus infections surged in the US, they seemed to broadly come down in Europe
- We have increased the risk profile by further adding BBB rated names
What’s happening?
Despite surging coronavirus infections in the US, credit spreads significantly tightened, thanks to the very positive vaccine news and an ease in political uncertainty after Democrat Joe Biden’s win was confirmed and President Donald Trump allowed the transition to get under way.
The US Treasury said it would not renew three key US Federal Reserve (Fed) emergency lending facilities at the end of this year despite the Fed’s public opposition to it. The Bank of England kept interest rates unchanged at 0.1% and expanded its bond-purchasing programme by £150bn, more than expected.
UK gilt yields rose slightly in November due to the global risk-on environment and new monetary and fiscal stimulus measures in the UK, with the government extending its wage-support scheme.
Portfolio positioning and performance
We were active in November in the secondary market, specifically focusing on COVID-19-challenged sectors and therefore buying bonds from UK real estate company Hammerson and Italian airport Aeroporti di Roma. Both were new additions to the Fund. Sterling investment grade primary issuance was average in November at £4.1bn. Since the end of February, we have gradually re-risked the portfolio, adding 8% of BBB rated bonds and taking our allocation from 45% to 53%.
Outlook
With the world’s economy not experiencing a ‘V-shape’ recovery, in our opinion, but rather a ‘swoosh’ one, monetary and fiscal support remain paramount to help cushion the economic damage caused by the new round of lockdowns.
Following the conclusive US elections and very positive vaccine news, we are ready to look through some near-term risks, such as Brexit, and believe that 2021 will be all about carry. Therefore, we plan to remain overweight BBB rated bonds in order to optimise the level of carry within the portfolio.
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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