Some fears of a US rate hike
The market remained focused on interest rates and inflation in July. There was a large downtick in long-term market rates, which might seem strange given that the economy is heading in the right direction. However, this movement can be attributed to a level of concern about the impact of the Covid delta variant and may also be a consequence of market fears of how a US interest rate hike might affect or limit economic growth.
The reporting season for the second quarter was generally positive, with many companies testifying to good outlooks. After some volatility during the month, this contributed to new stock-market highs. Despite the positive sentiment, global credit margins rose somewhat due to the interest rate slide as these exclusively have fixed-rate coupons.
The Nordic credit market had a quiet holiday month with few primary transactions and fairly stable credit margins due to lower activity. As Nordic corporate bonds primarily have coupons with variable interest rates, the effect of the interest rate downtick on credit margins was marginal.
The portfolio holdings in the safer segment have delivered stable reports, while the majority of the high-yield holdings are scheduled to report at the end of August. However, SSAB issued a strong report that in the long run may mean an upgrade to the safer debt segment. This would in turn lead to a good price increase for its bonds. Intrum, one of the fund’s larger holdings, also delivered a stable report.
Since market activity has been low, the minor adjustments we made to the portfolio were mainly in the secondary market to manage fund flows, with slightly increased exposures to names like SSAB, Link Mobility and Klövern.
Given continued uncertainty associated with the pandemic, we maintain our conservative approach with a balanced and diversified portfolio and a focus on liquidity. We continue to look to sustainable companies, which we are convinced will contribute to the long-term return. We also intend to keep both interest rate and credit durations low. A good recovery in credit margins since the start of the pandemic means that, in future, we expect a return in line with interest coupons.