At the end of Q1, sovereign yield volatility calmed a little as rising infection rates reminded markets that we are still not quite out of the woods yet globally regarding coronavirus.

Despite this, the fundamental drivers are still there for global growth to rebound, with Central Bank policy likely to be accommodative for the foreseeable future and fiscal stimulus planned of gigantic proportions. The environment therefore remains very supportive for credit markets and spreads still remain at or near their tights.

Having reduced duration fairly aggressively earlier in the year, we continued to pare it back as the opportunity arose and the direction of travel remains clear. We sold the last of our Severn Trent 40’s and our UK Power Networks 35’s also selling down some shorter Southern Gas Networks 31’s and United Utilities 29’s. National Grid saw a downgrade from all three rating agencies at the beginning of the month pushing the whole curve wider, their 40’s ended up nearly 30bp wider on the month. There was a fair amount of activity to offload longer dated utilities and this selling pressure did push spreads overall a little wider on the month.

The primary market in Sterling was active and new issues well supported, all pricing well inside of initial price targets. We took some of them, notably a new Workspace Group green 7-year paying 175bp over Gilts (initial IPT +190). Heathrow Funding also came with a 2nd Lien bond (senior secured but junior so just IG at BBB-), and had no problems pricing it a +210bp, demand pushing the spread in from +225bp.

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