Investors witnessed a dramatic shift in credit markets in the second quarter, with an impressive rally continuing the rollercoaster start to the year. This was a very welcome development, albeit taking many in the market by surprise with its magnitude and speed.
The gradual reopening of global economies, tentative positive news flow around potential COVID-19 treatments, together with the unprecedented levels of fiscal and monetary support from global policymakers, all helped markets to edge higher week after week, with extraordinary policy measures also helping to restore market mechanics. Despite some minor wobbles towards the end of the quarter as secondary spikes in coronavirus cases occurred, markets remained largely resilient as the quarter drew to a close.
As the quarter progressed and market functionality resumed, significant opportunities arose for investors seeking to capitalise on both attractive outright spread levels, but also on compelling relative-value positioning across different regions and credit-market subsets. The scale of the moves in markets also meant that this relative-value equation between different markets has been continually evolving, providing great opportunities for flexible investors with a broad opportunity set.
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Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss.
Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise.
Liquidity: There may be insufficient buyers or sellers of particular investments giving rise to delays in trading and being able to make settlements, and/or large fluctuations in value. This may lead to larger financial losses than might be anticipated. Loans: The specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. Many loans are not actively traded, which may impair the ability of the Portfolio to realise full value in the event of the need to liquidate such assets.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.