A volatile path to positive returns
Most credit asset classes posted a positive return in the quarter, but the path to this outcome was rather volatile – the evolving COVID-19 situation and concerns over the economic impact of associated restrictions, coupled with supply chain issues, created fluctuations in investor sentiment. In September, an apparent hawkish shift in tone from key central banks, coupled with an intensification of concerns around inflation dynamics caused a pivot in markets, pushing up US Treasury yields and leading to a sell-off in government bonds.
This ebb and flow in sentiment was largely mirrored in credit markets, with most markets experiencing some softness in July before roaring back over the summer, and then giving up some of those gains in late September amid the rate-induced volatility. One consistent feature across all credit markets through the quarter was the continuation of robust new issue volumes, with a variety of markets running at record levels. For the most part, these volumes were digested comfortably, which is illustrative of the generally favourable fund-flow environment, along with a continued reach for yield by investors. That reach for yield, and price appreciation, was again evidenced in both the high-yield and loan markets, where the CCC rated categories led the charge in terms of returns.
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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.