Fixed income

Global Short Duration strategy Strong rebound following unprecedented central bank stimulus

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.

Source: AXA IM as at 30/04/2020. The data is based on a representative account that follows the strategy and is not intended to represent actual past or simulated past performance of the strategy. Past performance is not a reliable indicator of future results. Performance calculations are net of fees, based on reinvestment of dividends.

 

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.

 

Asset class breakdown

Portfolio breakdowns

 

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.

[1] Yield and duration calculations include cash held within the portfolio, use the next-call method for all Financials in the portfolio and duration/yield-to-worst for all other holdings. The yield is calculated gross of fees. Please note that the yield calculations are based on the portfolio of assets and may NOT be representative of what clients invested in the strategy may receive as a distribution yield. Yields are not guaranteed and will change in future.

[2] Rating is the worst of S&P, Moody’s and Fitch. In the rare case of an unrated issuer we will assign an internal credit rating.

[3] Representative Account has been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place. Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, strategies and/or services described herein. In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such. Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein. The performance results for representative accounts are net of all fees and reflect the reinvestment of dividends or other earnings.

[4] Any Emerging Market Sovereigns are classified under “Sovereign” for the purpose of this breakdown.

[5] Any Emerging Market Sovereigns are classified under “Emerging Markets” for the purpose of this breakdown.

 

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