Market review

Global yield curves steepened, while most spread sectors tightened modestly as vaccine rollouts offered hope of economic reopening along with an increased probability of additional fiscal stimulus supported by a democratic win of U.S. Senate elections.

US economic data was moderately positive:
  • Fourth quarter annualized GDP printed below expectations and record imports of consumer goods pushed the trade deficit over a decade-high.
  • The labour market stalled as non-farm payrolls missed expectations and jobless claims peaked intra-month.
  • Increased restrictions suppressed spending at restaurants and shopping malls, dragging down retail sales; meanwhile consumer confidence edged higher driven by additional pandemic relief.
  • The Markit manufacturing PMI surged on robust new orders and strong consumer demand lifted services PMI. Philadelphia Fed Business Outlook reached pre-pandemic levels with increases in new orders, shipments, and employment.
  • Housing market data was largely positive, bolstered by pandemic induced demand and low mortgage rates.

Most global sovereign yields rose, echoing the U.S.-led move across rates markets. The U.S. Treasury yield curve steepened on the likelihood of increased U.S. fiscal stimulus, stoked by democratic U.S. Senate election victories in Georgia. In Europe, gilt yields inched higher aided by comments from the Bank of England Governor Andrew Bailey who dampened expectations for a negative policy rate in 2021.

Global credit bonds outperformed duration-equivalent government bonds as credit spreads tightened. Within the securitized sectors, agency mortgage-backed securities outperformed duration-equivalent government bonds, as did commercial mortgage-backed securities and asset-backed securities. Within emerging markets (EM), external debt had negative total returns as U.S. rates hurt performance. Local debt had negative total returns on account of EM currencies depreciation.

Performance and attribution

Long exposures within EM Opportunities, primarily to Latin Americas countries such as Mexico and Panama detracted, overwhelming positive contributions from short positions in Germany. 

Within Core Challenges, long exposures to South Korean and Israeli government bonds were the primary detractors. We maintain these positions and have added exposure to China given the country’s expanding economy which appears to be further along the recovery path.

Securitized credit allocations, within TALF Trickle Down, were the largest positive contributors over the month, primarily collateralized loan obligations (CLOs) and Credit Risk Transfer (CRT) securities. These structures have continued to benefit from a combination of strength in U.S. housing, demand for higher-yielding paper and collateral fundamentals which continued to trend more positive.

Currency strategies that featured shorts to the U.S. dollar detracted as the dollar gained 0.7% and longs to the GB pound at the start of the month benefited after gaining 0.3% on the U.S. dollar.

Exposure to bank loans within Tactical strategies contributed favorably over the month, as positions within consumer discretionary and communications issuers benefited.

Positioning and outlook

During the month, overall duration increased slightly from 5.8 years to 5.9 years. 

During January, we trimmed some exposure to U.S. inflation-linked bonds within Activists Governments, taking profits following the shift higher in breakeven inflation rates. As the long‐term disinflation trend may be reversing, we still favour global inflation‐linked bonds and maintain exposure to Germany, Japan and Canada.

We continue to focus on COVID recovery stories with good industry structures, primarily dislocated credits where asset coverage well exceeds debt. Within investment grade credit, the account maintains its long bias to the sector, via IG CDX, as a relative value trade supported by our belief for muted spread volatility given a supportive Fed.

We continue to believe that strong global fiscal and monetary stimulus will support the Emerging Markets recovery and we maintain a pro-risk lean, favoring select LATAM and APAC countries.  

Important information

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