Against a backdrop of further falls in rates despite another poor inflation figure from the US (CPI hitting 5.4%) and much choppier equity markets, Tenax has had a more active period.

We know that inflation was always going to be going up this year as we work through comparisons with 2020 (Oil prices were sub $20 in April 2020, and have recently been up to $75) but the recent figures are definitely overshooting expectations. Production bottlenecks (significantly, including staff shortages) are putting upward pressure on prices – starkest being a 25% fall in European car production this year against demand at its highest for five years.

Despite these figures, bond markets appear to be determined to look through them and side with Jerome Powell and other central bankers who contend that the inflation is transitory. Of course, much of it will be transitory, but pressure is building on wages and employment figures are likely to improve so I think that there is a limit to how long the Fed will wish to wait before starting to taper and looking at rates. The fall in 10-year yields to 1.25% in the US and 0.56% in the UK (30-year to 1.9% and 1% respectively) is a conundrum. Maybe this is to do with pension fund rebalancing, concerns that the recovery would be short-lived thanks to the Delta variant, market positioning being too exposed after the Q1 falls or a judgement (?) on the terminal rate for this cycle… There is little consensus on the reasoning but, whatever it is, these bond yields are not attractive.

Within the Tenax Fund, we have continued to build our floating rate exposure and reduce fixed interest, which remains invested at the short end, the overall duration remains at 2.4 – see chart, right.

A recent addition to the floating rate book is a new AAA issue from TSB Bank of notes due in 2028 while in fixed, the Yorkshire Building Society 3% 2025 have gone along with JPMorgan 0.99% 2026. It was not all sales in fixed interest, as ever we track the new issue market closely for opportunities, we acquired a relatively small holding in Anglian Water 2% 2028, which is a ‘green bond’ whose payments are linked to their ability to reduce emissions i.e. they will have to pay higher interest if they fail to meet carbon emission targets.

We added further to our holding in Derwent London 1.5% convertible 2025, adding to our interests in central London property exposure, Derwent have just announced the sale of their Angel Square, Islington, property at a “substantial premium” to the December 2020 book value. Elsewhere in property, we have sold our remaining warehouse logistics holding, an area that has led for a while, we are more interested in some of the (still unloved) areas of property investment, notably central London offices and leisure. We are building a holding in Capital & Counties, owners of the Covent Garden estate in Central London. CapCo also acquired 25% of Shaftesbury during the gloom last year, a company in which we also own a stake. The final part of this is that we are also building a stake in the Capital & Counties 2% convertible, which, unusually, is convertible into part of their stake in Shaftesbury.

The equity exposure shows little change overall, though we have reduced our international exposure while adding further to the UK. Our focus is now much more on UK larger companies, we have just added to our holding in the London Stock Exchange Group, though we did take some stock in a placing of shares in Rathbone Bros recently (a mid-cap company), which we felt were attractively priced and have added to this holding subsequently.

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