But it was events overseas that had UK investors on tenterhooks. The eurozone sovereign debt crisis continued to take centre stage. Concerns that the situation was set to reignite abounded after political upsets in France, Holland and Greece. The latter failed to elect a government at the general election, with anti-austerity parties to the left threatening to rip up any bail-out agreements. Greeks will now have to go to the polls for a second time next month. Markets will no doubt remain unsettled until a clear winner emerges.
France has a new president in the shape of socialist Francois Hollande. He too ran on an anti-austerity platform, vowing to renegotiate the recent EU fiscal pact so that it is a “growth pact”. Angela Merkel, German chancellor, will look to hold talks with M. Hollande as soon as possible.
Spain, too, came under renewed pressure as traders questions whether the Iberian nation could meet its strict deficit targets. Weakness in the Spanish banking sector also weighed on sentiment. The country is also mired in recession, while employment is at a whopping 25%. Why does this matter? The eurozone is the UK largest trading partner and, as such, instability there has a knock-on effect on these shores.
Money market yields, meanwhile, remained under downward pressure with the system still awash with liquidity after the European Central Bank’s three-year long-term refinancing operations. This is being exacerbated by Moody’s review of bank ratings, which is causing investors to adopt extremely defensive strategies. The net result is an increasing scramble for the perceived better-quality names and a consequent downward shift in yields, particularly in shorter maturities.
Activity
As with previous months, we continued to run our portfolios in a conservative e manner, concentrating on lower risk trades. For the ICF, we added to our ABS position through the purchase of short tail-end bonds, which, despite being shorter-dated, still offer a large pick-up over cash rates. FRN (floating rate note) activity was restricted to small additions to existing positions, and one new trade in a triple-A rated two-year SSA (state sovereign and supranational) name.
As for the GLF, Fund activity was mainly focused on the stronger available banking names, while avoiding the more dislocated parts of the eurozone. With fewer opportunities in SSAs due to the falling levels available through swap markets, we once again sought to gain exposure to the sector through the FRN (floating-rate note) market. As such, another position was added in a triple-A Canadian issuer. Overnight levels were kept between 30% and 35% throughout the month, thereby ensuring we had sufficient liquidity within the Fund and a low WAM (weighted average maturity) of around 35 days.
April 2012
The information provided has been derived from sources which we consider to be reasonable & appropriate. It also includes our views, forecast opinions and expectations which cannot be taken as fact. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact, nor relied upon when making investment decisions.