Global Short Duration strategy Strong rebound following unprecedented central bank stimulus
- 22 May 2020 (7 min read)
Key points:
- Credit spreads significantly tightened on the back of unprecedented global central bank stimulus and…
- …despite historically weak economic data releases
- We keep on gradually adding to attractive opportunities in high yield and emerging markets
What’s happening?
Despite historically weak economic data releases, credit spreads significantly tightened in April driven by the unprecedented accommodative monetary support from global central banks, a slowdown in new coronavirus cases and the lifting of lockdown measures in some countries towards month-end.
The US Federal Reserve continued its policy support, as it implemented a new loan programme worth up to $2.3 trillion, while stating that it would do whatever was necessary to back the economy. The European Central Bank announced an extension to its record-low interest rate loan facilities to banks, while maintaining its €750 billion bond-buying programme.
Despite this risk-on environment and large amounts of government debt issuance, US treasury, German bund and UK gilt yields still fell as global central banks stepped up their sovereign bond purchases.
Portfolio positioning and performance
Sovereign: we remain invested in short-dated US treasury inflation-linked bonds due to attractive valuations.
Investment Grade: we kept on gradually reducing our bias towards investment grade in order to capture attractive opportunities in high yield and emerging markets. We were still active in the primary markets, buying US chemical company DuPont in US dollars and French real estate company Unibail in euros, both being new additions to the strategy. We also started to gradually reduce our exposure to European peripheral names that had recently outperformed.
High Yield and Emerging Markets: we continued to add to high yield and emerging markets, buying the new issue from US media company Netflix in euros and investing in some Asian corporates. Due to the gradual re-risking undertaken since late March, we now have a 26% allocation to high yield and emerging markets – up from 19% at the end of February – and are therefore getting closer to our long-term neutral allocation of 30%.
Outlook
While the outlook remains uncertain despite unprecedented fiscal and monetary support globally, the widening of spreads since late February has made us more positive on risk assets and, as such, we started to gradually add risk to the strategy.
Should the coronavirus outbreak stabilise and/or spreads widen further, we will look to keep on gradually adding to high yield and emerging markets by reducing our allocation to investment grade.
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.
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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.