Fixed income August update


Jonathan Platt, Head of Fixed Income

16 August 2016

The key developments in fixed income markets since the Brexit vote have been:
the significant drop in UK gilt yields
the Bank of England’s monetary policy announcement
reversal of post-Brexit credit spread widening
A number of trends in credit markets have also emerged, with large multinational issuers rebounding strongly during July, while asset-backed, financial and subordinated issues have lagged in comparison.
 
The fall in gilts yields and recent contraction in credit spreads has supported longer-date bond performance.
Effect upon credit portfolios
The post-Brexit backdrop has been challenging: our short-duration positioning and low exposure to multinational issuers have chipped away at relative performance. But the higher yielding structure of our credit funds means that they are well-positioned to outperform as the ‘hunt for yield’ continues.
What next?
We expect the BoE will reduce rates further, that low interest rates will persist across core developed markets and that the background for credit will be pretty benign. 
In terms of risks, a pick-up in inflation or default rates or a renewed financial crisis could undermine our outlook. We will monitor these trends, but we do not expect they will pose a threat over the coming months.

The key developments in fixed income markets since the Brexit vote have been:

  - the significant drop in UK gilt yields

  - the Bank of England’s monetary policy announcement

  - reversal of post-Brexit credit spread widening

A number of trends in credit markets have also emerged, with large multinational issuers rebounding strongly during July, while asset-backed, financial and subordinated issues have lagged in comparison. 

The fall in gilts yields and recent contraction in credit spreads has supported longer-date bond performance.

Effect upon credit portfolios

The post-Brexit backdrop has been challenging: our short-duration positioning and low exposure to multinational issuers have chipped away at relative performance. But the higher yielding structure of our credit funds means that they are well-positioned to outperform as the ‘hunt for yield’ continues.

What next?

We expect the BoE will reduce rates further, that low interest rates will persist across core developed markets and that the background for credit will be pretty benign. 

In terms of risks, a pick-up in inflation or default rates or a renewed financial crisis could undermine our outlook. We will monitor these trends, but we do not expect they will pose a threat over the coming months.

For professional clients only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Sub-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market.