Fund Objective

There is no fund objective available from this fund manager.

View on Past Performance

During December, concerns remained about the effects of the US sub-prime mortgage market on the banking sector and the global economy. The Federal Reserve and Bank of England cut rates and global central banks announced that they would provide liquidity for money markets in a coordinated action. The announcement reduced short-term liquidity concerns and the 'flight to quality' to government bonds.The fund was positioned for 2-year swap rates to fall relative to 10-year swap rates. The central banks' announcement caused a reduction in the swap spread over government bonds. Dovish minutes from December's MPC meeting led to lower interest rates being priced in by the market and the gilt market therefore rallied. We positioned the fund for 50-year gilts to outperform 30- year gilts and a large demand for 50-year gilts from pension funds led to the trade being profitable.We sold 10-year US treasury futures and purchased 10-year German bund futures. We bought additional 10-year bund futures reflecting the lower volatility of bund yields compared to US yields. However, government bonds sold off following hawkish ECB rhetoric and resulted in the trade losing money in the month.

Future Expectations

There is increasing evidence that US housing market weakness will spill over into the wider US economy and there will be further interest rate cuts in the US. Banking sector losses are likely to lead to tighter credit conditions for a longer period of time than previously expected. The UK economy is particularly exposed to tighter credit conditions and there is evidence that the economy was slowing before the full impact of tighter credit had been felt by the consumer.We therefore see downside risks to the UK economy and believe that additional interest rate cuts will be priced in. We believe that a weak US and UK economy is likely to impact European growth and therefore we maintain our outright positions in Europe.

Fund Details