Fixed income

Sterling Credit Short Duration strategy: The rally continues

Key points

  • Credit spreads continued to tighten
  • Vaccine rollout started but coronavirus infections remained elevated
  • The risk profile was broadly unchanged

What’s happening?

Despite elevated levels of coronavirus infections globally and the discovery of a new, highly contagious variant in the UK, credit spreads still tightened in December, supported by the start of coronavirus vaccinations in a number of countries, the announcement of a new $900bn fiscal stimulus in the US, and news that the UK and EU had finally struck a trade agreement.

The US Federal Reserve left interest rates and balance sheet policy unchanged, while the European Central Bank raised its emergency asset-purchasing programme by a further €500bn to €1.85trn and also extended the programme’s closure date by nine months to the end of March 2022 at the earliest.

UK gilt yields fell following the discovery of a new variant of coronavirus, leading to stricter lockdown measures, while the Bank of England’s Monetary Policy Committee opted to hold rates at 0.1%.

Portfolio positioning and performance

Despite sterling investment grade primary issuance being very subdued in December at only £0.4bn, we were still active, buying a new issue from US carmaker Ford. 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

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 the start of the vaccine roll-out in an increasing number of countries, we are ready to look through some near-term risks and believe that 2021 will be all about carry. Therefore, we plan to remain overweight in 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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