Dynamic Bond Trust - January 2012 update

The Euro-zone sovereign debt crisis continued to drive market volatility, with gilts and bunds attracting further safe-haven buying. Yields also fell sharply in France, Spain and Italy but soared in Greece as the country edged towards default. Despite the lack of political progress towards a solution to the crisis, investors drew some comfort from the ECB’s 0.25% rate cut and its efforts to avert a credit crunch by offering banks unlimited three-year loans at just 1%.

We raised net exposure to financials, chiefly in the Lower Tier 2 and senior levels of the capital structure. While our intra-month turnover in the banking sector was relatively high, we were particularly active among some of the stronger US banks with short call dates (issues that could be repurchased or exchanged for alternative securities, usually on attractive terms for the holder). However, we reduced exposure to French banks on concerns over their capital positions and further signs that France’s AAA credit rating is in jeopardy.

We increased stock specific exposure to investment grade short-dated non-financial credit. We acquired a two-year issue from Spanish-headquartered telecoms provider Telefonica as sovereign concerns pushed the spread to a level we deemed attractive, particularly as the company generates around 70% of its revenues from outside Spain. Meanwhile, we retained our preference for longer-dated government bonds, with our focus on ‘safe-haven’ holdings in gilts, bunds and US treasuries.