Sterling Credit Short Duration strategy: The rally resumes despite the re-imposition of national lockdowns
- 11 November 2020 (3 min read)
Key points
- Credit spreads tightened, supported by strong technicals
- Sharp increases in coronavirus infections led to the re-imposition of national lockdowns
- We kept the risk profile broadly stable
What’s happening?
Despite renewed national lockdowns, particularly in Europe, the prospect of a contested US election, and the lack of progress on a new stimulus package in the US, credit spreads still tightened supported by strong technicals.
The European Central Bank, which again held interest rates steady, hinted that it could provide further monetary policy support before the end of this year.
UK gilt yields rose slightly in October despite the reintroduction of national lockdown measures. This was driven by the sharp rise in US treasury yields as the market started to price in a Democratic sweep which would lead to higher levels of fiscal stimulus.
Portfolio positioning and performance
We were active in October in the secondary market, buying bonds from US media company Discovery and Danish shipping company Maersk, the latter being a new addition to the Fund. Sterling investment grade primary issuance was light again in October at only £4.7bn. Since the end of February, we have gradually re-risked the portfolio adding 5% of BBB rated bonds, taking our allocation 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 particularly since the fourth quarter is expected to be softer.
As such, with valuations back to early March levels, we’ve paused the re-risking of the Fund as the outlook remains uncertain with a potentially contested US election, renewed national lockdowns in Europe to contain the second wave of coronavirus that could become stricter and/or be extended, 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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