Opportunities arise from recent market volatility.
We continued to see strong demand for credit for most of the third quarter as investors searched for yield and sentiment remained positive.
In what is typically a quiet month for credit markets, bond issuance volumes hit record highs in August as companies sought to take advantage of low borrowing costs, and this was met with strong investor demand fuelled by robust flows across most credit asset classes. Investors’ increased appetite for risk pushed up Treasury yields while also boosting demand for high-yield bonds.
However, as the quarter progressed, headwinds grew: COVID-19 infection rates increased across much of Europe and the US as economies opened up; economic data was more muted relative to the strong May/June rebound; and political uncertainty rose due to the impending US elections. While this dampened the overall returns posted by high-yield bond markets, it also gave rise to some compelling relative-value opportunities in the high-yield market as we discuss in our Spotlight piece this quarter. Meanwhile, consistent investment-grade markets posted a significant tightening of spreads over the quarter, helping both US and European markets to deliver excess returns over government bonds.
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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.