Explore how the fund has performed since its launch on 31 March 2011 by using the interactive timeline.
The fund is launched at time when the general consensus was that the gilt market was exhibiting a bubble because of low par gilt yields.
Our forward rates process shows that only those yields closely correlated with base rates were at historic lows. Medium and long-dated forward yields were actually higher so the fund took overweight positions to benefit from slowing economic growth.
Read blog posts from Stuart Thomson, Ignis’ chief economist, and the rates team as they share their views on the economy and financial markets.
ECB raises rates in response to higher commodity prices and rising inflation. The team believes the ECB rate hike is wrong and anticipates the mistake could be repeated in the summer.
A second hike follows in July despite clear evidence of rapidly slowing global economic activity. This presents numerous profitable strategic and trading opportunities for the fund.
Greece was the most vulnerable peripheral economy to global slowdown and is forced to seek a second bail-out. Once this weakness was identified financial markets quickly turned their attention to Italy and Spain.
The lack of any coordinated eurozone response worried markets, increasing demand for safe haven assets to which the fund is exposed. The fund also switched its 3yr2yr forward gilt positions to bunds on the view that the ECB will reverse its two previous hikes by the end of the year.
Beware of Greeks bearing defaults
Blackadder 5 – Baldrick’s cunning plans for Greece
S&P’s decision to downgrade US sovereign credit rating to AA+ heightens concerns over the shortage of safe haven assets (US is 50% of global triple AAA assets).
Concerns translate into excessive levels of interest rate volatility. The team believes this is unwarranted with the US to remain a safe haven, and sold volatility. The resulting central bank response (pledge to keep the Fed Funds Rate at record lows until mid-2013 at the earliest) saw volatility subsequently fall rapidly.
Concerns translate into excessive levels of interest rate volatility. The team believes this is unwarranted with the US to remain a safe haven and sells volatility. The resulting central bank response (pledge to keep the Fed Funds Rate at record lows until mid-2013 at the earliest) saw volatility subsequently fall rapidly.
S&P choose debt over democracy in a pale imitation of the thirties
Having anchored the short-end of the Treasury curve, the central bank turned its attention to longer-dated maturities, and announced ‘Operation Twist’.
The Fed announces Operation Twist, whereby it sells $400bn of its short-dated portfolio in order to reinvest in medium and longer-dated treasuries. The team correctly anticipates Fed will ‘Twist’ rather than, as widely expected, expand its balance sheet. The fund benefitted having already taken long-dated treasury forwards.
Twist on the lost decade highway
Liquidity provision vs stimulus: understanding the difference between QE1 and QE2 (and twist)
QE2 launched on 6th October with a commitment from the Bank of England to buy £75bn worth of gilts over four months.
At the start of Q4 market consensus was that the Bank of England would resume QE in November. The rates team broadly shared this view, but acknowledged the possibility it may come early to prevent deflation. A position was therefore taken in long-dated forwards, which benefitted from the early QE2 announcement.
MPC launches QE2 with a twist and shout
Ahead of the ECB meeting in December, the fund closed its short European positions and built exposure to 3y2y EONIA and German risk. This performed well into the year end following the LTRO announcement. Core long positions in the front end of the Canadian curve (2y2y) and the belly of the Australian curve (5y5y) were also strong.
Ahead of the ECB meeting in December, the fund closed its short European positions and built exposure to 3y2y EONIA and German risk. This performed well into year end following the LTRO announcement. Core long positions in the front end of the Canadian curve (2y2y) and the belly of the Australian curve (5y5y) were also strong.
Bright light for PIIGS is the match sparking the barbecue
Jan - Feb
Equity markets were in buoyant mood but the Rates team believes no solutions have been found to tackle the underlying structural issues. The fund retained its cautious core positions with tactical trading around these generating gradual gains despite the bounce in risk assets.
The Rates team used the fall in implied volatility to build a long US volatility position and a short US rates position. The fund to re-entered core long positions in front-dated forwards in the UK and Europe, building risk into the end of the quarter and adding exposure to short the Australian Dollar (AUD) position on the growing concern surrounding slowing Chinese growth.
Apr - Jun
Risk assets sold off sharply through April and May as the focus shifted back to peripheral Europe, namely Spain and Italy, and slowing growth in China.
The Rates team believed the volatility of the 30y rate in Europe reaching close to 140bps annual volatility in June signalled ‘extreme’ levels which were not justified by fundamentals. A position was taken based on an expected correction and performance generated when volatility fell by around 60 normal bps by month end.
Jul - Aug
Towards the end of July, European Central Bank (ECB) president Mario Draghi expressed his commitment to defend the euro at all costs. He later outlined the support framework provided by the Outright Monetary Transactions programme which set a more positive tone for the market.
Anticipating that the delivery of temporary solutions in Europe would reduce the likelihood of extreme events, the Rates team positioned the fund for a fall in market volatility. There was also a preference for taking a long position in front-dated forwards on expectations that growth would remain subdued.
The ECB’s Outright Monetary Transactions announcement led to improved sentiment with Spanish and Italian government bonds producing positive returns, while treasuries, bunds and gilts were weaker. In the US, the Fed finally voted to extend QE through indefinite purchases of $40bn of Mortgage Backed Securities (MBS) per month. This took the dollar lower against the euro and pushed up inflation expectations.
Oct - Dec
The US elections and the impending fiscal cliff took centre stage through October and into November before a last minute resolution on the latter was reached at the end of the year. Politics also shaped markets in Asia, with Chinese economic policy announcements watched closely and the change of Japanese leadership in December potentially signalling a more dovish stance on inflation and stimulating growth.
The Rates team expected that a relaxation in the inflation target in Japan would prompt more speculative policies and weaken the currency and sold Japanese yen versus US dollar.
Two issues worried markets, sparking a greater-than-expected rally in bonds. The Rates team’s outlook remained unchanged but action was taken to shift risk positioning. The short rates exposure was reduced and an increased focus placed on positions that will perform well if the risk-off tone continues.
In this environment, the Rates team maintained its core pro-growth position whilst establishing tactical hedges to mitigate short-term moves against the strategy.
In particular, the fund shifted its short front-dated forwards out of the UK in favour of the US, where the team’s conviction was stronger, and increased the size of the short inflation positions.
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