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4 February 2021

January fixed income and treasury update

While investors may have made the most of the “Biden bounce”, the rapid “V-shaped” economic recovery which has already been priced into many economic models, still seems some way off.

The rationale goes that while the country has been told to stay at home, household savings that would normally have been spent on going out or shopping have instead been sitting quietly in bank accounts waiting for high streets to open again or pushed into pensions driving equity valuations higher.

But as my wife prepares to work yet another Sunday shift for the NHS because of overflowing Covid-19 hospital wards it is not easy to share that sense of optimism. And, of course it’s not as if we can just go back to look at previous economic models of a pandemic as they simply don’t exist.

Yet for all the uncertainty, there are a number of steps that we have taken, particularly in my part of the business of fixed income and treasury, to not only make sure we are protected to some degree from any potential downside but can also continue to take advantage of market opportunities when they emerge.

One of the things we did at the very start of the pandemic was look at our cash position. Cash is critical for the functioning of any scheme and we continue to be very conservative with our cash. That means keeping a healthy cash buffer to avoid any nasty surprises.

Equally, when the market dislocation in March really hit and credit spreads widened aggressively, we bought synthetic credit exposure which allowed us to increase our exposure to the markets without tying up much additional capital. As credit spreads have tightened again so we have turned this synthetic exposure into physical bonds invested in high quality companies which will support their recovery. We are now actively engaging with banks’ syndicate desks to ensure that they know we are in the market, particularly for long-term inflation-linked opportunities.

Over the last year or so we have materially increased our exposure to liability-matching assets such as bonds which help us protect ourselves against rising inflation while also supporting us in paying pensions as they fall due.

There is more to come. At the start of 2020 when I joined the team there were six of us looking after fixed income and treasury and by this time next year, we are expecting to increase our numbers significantly. As we build our capability, so we are taking more of these mandates in house which means we are able to do more to invest the scheme’s assets at a lower cost than paying an external manager for the same service.

So while there may still be hard yards to go before that recovery can start in earnest, we at USS Investment Management have been working hard to position the scheme’s assets positively for the long-term, whatever happens.

Nothing in this article should be construed as an offer, invitation or general solicitation to buy or sell any investments or securities, provide investment advice or to engage in any other transaction or service.