Global financial markets saw severe volatility in September, as the credit crisis returned to centre stage. Initial relief following the move by US authorities to take control of Freddie Mac and Fannie Mae was replaced by shock over the collapse of Lehman Brothers, the takeover of Merrill Lynch and the government bailout of AIG.Risk aversion rose sharply and market liquidity dried up. Government bond yields fell sharply, benefiting from a huge flight to quality. However, yields rose towards the month-end as investors' fears abated after the US Treasury introduced its $700 billion bailout plan.The fund remained overweight duration to take advantage of increased risk aversion and the growing prospects for lower interest rates amid the worsening economic outlook.The fund's positioning at the long end of treasuries benefited performance, as the sector performed well in the US. However, the position at the long end of UK gilts detracted as this area underperformed the rest of the curve. In FX, long yen positions against the US dollar, euro and British pound added to performance, with the Japanese currency benefiting as a safe haven for investors seeking to avoid risk and unwind carry positions.
