Fixed income

Global Short Duration strategy: Hopes of additional US fiscal stimulus support spread performance

Key points

  • Credit spreads continued to tighten, supported by hopes of additional US fiscal stimulus
  • Slow start of the vaccine rollouts weighed on sentiment
  • The risk profile was broadly unchanged

What’s happening?

Despite concerns around the slow pace of coronavirus vaccine rollouts and the spread of new, more infectious strains, credit spreads still tightened. This was supported by hopes of additional US fiscal stimulus after the Democrats won control of the Senate, and some solid corporate results.

The US Federal Reserve left interest rates and balance sheet policy unchanged while dismissing questions on tapering as ‘premature’. The European Central Bank policy meeting was also uneventful, with all policy levers left unchanged.

US treasury, German bund and UK gilt yields rose in January due to hopes of further US fiscal stimulus and increased inflation expectations, with the yield on the 10-year US treasury going back above 1% to hit its highest level since March.

Portfolio positioning and performance

Sovereign: We remained invested in short-dated US treasury inflation-linked bonds, despite their recent strong performance.

Investment Grade: We slightly reduced our exposure to investment grade during the month due to expensive valuations. We were still active in both primary and secondary markets, participating in several new issues while taking profits on some cyclical names.

High Yield and Emerging Markets: We slightly increased our exposure to high yield and emerging markets by participating in several new issues. Due to the gradual re-risking undertaken since late March, we now have a 43% allocation to high yield and emerging markets, up from 19% at the end of February.

Outlook

Monetary and fiscal support remain paramount to help cushion the economic damage caused by the new round of lockdowns.

Following hopes of additional US fiscal stimulus and the expected acceleration of the vaccine rollout globally, 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 high yield and emerging markets in order to optimise the level of carry within the portfolio.

 

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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