Portfolio Manager comment Coeli Likviditetsstrategi August 2020
Likviditetsstrategi advanced during August with 1.14 percent. Since year-end, the NAV per share has consequently increased by 0.55 percent. The momentum in the corporate bond market remained positive with tighter credit spreads in both the investment grade and high yield segments. For the most creditworthy companies’ spreads are now in many cases back at the same levels seen at the beginning of the year. The recovery in the high-yield segment has been noticeable, but the spreaders have not yet returned fully as much. The fact that the relative tightening for the more stable companies has been faster reflects the challenging economic outlook and is an effect of these companies being more directly affected by the central banks’ extensive purchases of bonds.
In the Nordic region, the primary market opened at full speed towards the end of the month, most transactions were met with high demand from investors and closed below or in the lower part of the indicated pricing.
The largest contributor of the month was Sirius Group, whose bonds rose in value after the company announced a merger with the reinsurance company Third Point Re. The merger solves the corporate governance issues that Sirius have had, and S&P was therefore able to remove the company from “Credit Watch Negative”. The two companies are considered to complement each other, the new company will have a larger capital base and a broader product portfolio – which ought to be positive both from a customer perspective and in the rating agencies’ assessments.
The credit management company B2 Holding continued to develop strongly and made a significant return contribution. B2 presented its report for the second quarter, where significant information had already been released, which showed a strong cash flow and good liquidity. Bonds from Golar LNG Partners were also performing strongly following the release of its quarterly report that lived up to expectations. Golar currently focuses on refinancing a major bank loan and thereafter repaying the two outstanding bonds before May 2021.
Bonds from Hexagon Composites were divested after the company’s quarterly report showed declining revenues and significantly deteriorating margins. As replacement, a new investment was made in bonds from Teekay LNG Partners, a company whose business model provides very stable cash flows and potential for reducing leverage in the coming years. Among the fund’s holdings of bonds from real estate companies, the holdings of Samhällsbyggnadsbolaget i Norden were reduced at the same time as a bond with a short maturity from Fastpartner was partly replaced by one with a longer maturity.
In August, the Federal Reserve (FED) in the US changed its monetary policy target for inflation from a fixed target inflation rate of 2 percent, to a more dynamic target of an average inflation rate of 2 percent over time. Could be considered a small change, but the means that the Fed is opening for low interest rates over a longer period, even if inflation temporarily would be above 2 percent. Without any new fiscal stimulus announced, President Trump introduced a new tax deferral regime, giving American citizens increased flexibility in timing of tax payments. This does not imply an actual tax cut but is still considered to stimulate the economy through a more flexible approach to when in time tax payments will take place.
The stock markets have continued its upward trajectory since the spring and the S&P 500 saw gains during the month of 7 percent, which is the largest increase in the month of August since 1986. Despite the Corona virus continues to spread in the country and new conflicts between the US and China have flared up. The stock markets in the US are now trading with a positive return during the year, with Nasdaq standing out with a gain of 38 percent year to date.
During the month, Swedish inflation statistics for July were released, which showed the CPIF rising by 0.5 percent. Excluding energy costs, the rate of increase was 1.5 percent, relieving for the Riksbank, which had expected an increase in the price index of 1.1 percent, thus the trend from June continues with a higher-than-expected inflation rate.
Since April, the Riksbank has supported the money market with, among other things, the purchase of commercial paper, which experienced major liquidity problems during the month of March. The Riksbank’s framework stipulates that the total volume of holdings may not exceed SEK 32 billion. Since its introduction, the Riksbank has purchased commercial paper for almost SEK 23 billion and at the time of writing has 2.6 billion on its balance sheet. During this time, credit spreads have declined, liquidity has increased significantly, and issuers have returned to issue new volume. During September, the Riksbank will start its purchases of corporate bonds and it will be interesting to see if it will have the same positive effect as it has had on the commercial paper market.
It has previously been announced that the Swedish National Debt Office (Riksgälden) would issue the Swedish government’s first green bond, this took place shortly after the end of August. The green bond framework will contribute to Sweden reaching its climate goals. Interest in the issue was strong and the order books measured SEK 48 billion, a total of SEK 20 billion was issued with a credit spread of -32 basis points.
European and Nordic credit markets continued to show falling credit spreads in both the high-yield and the investment grate segment. Strong inflows to fixed income funds during the summer has been a contributing factor. Stibor 3-month was noted at 0.0 percent at the end of the month and the Swedish 10-year government bond was quoted at 0.14 percent.
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DISCLAIMER. The information provided here does not constitute professional financial advice. Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested. The key investor information document (KIID) and prospectus are available at www.coeli.se.