The bottom has fallen out of gilt yields and high-yield credit spreads have been bouncing all over the place. The iTraxx high yield spread index hit a two-year high of 249 basis points (bps) to 310bps during the month, before rallying in early June to 245bps after the month-end.
These are the kinds of fluctuations that you see towards the back-end of a business cycle. The macro-implied probability of recession has spiked recently. The yield curve has inverted in the US and the UK; never a good sign about an economy. Exactly how long between an inversion and an economic downturn is extremely difficult to predict. Sometimes it is nine months, other times it is two years or more.
We are not calling the end of the market - that is a dangerous thing to be doing. Before you know it you are a perma-bear wheeled out onto CNN every week to talk about how your portfolio of gold and linkers is holding up. Instead, we think it is time to start winding down our fund's risk, starting, of course, with the riskiest parts of the portfolio.
It is an interesting time in debt markets. Spreads have been getting volatile, but they remain relatively tight. Despite the US picking trade wars with friends and enemies alike, less stringent bond covenants for borrowers and rising defaults around the world, people are still paying up for credit risk. So is the European Central Bank through its quantitative easing programme.
Meanwhile, the US Federal Reserve has turned exceedingly dovish, which should boost the economy and keep bond yields pinned to the floor.
We have started to become more cautious. We have started reducing our credit risk by selling into the rallies. A number of factors have led us to this point: the OECD leading indicator has turned south, accompanied by a raft of global PMIs.
Confidence indicators are declining around the world and Asian export orders have gone into reverse. Banks are tightening their lending, too, which may start to squeeze consumers. We are trying to balance these risks with not standing in front of the Fed (betting against the world's most powerful central bank never ends well).
We are not expecting the world to end tomorrow. Rather, we are preparing ourselves for a future that now looks like it will be different than the recent past. We have benefited from a very good run for credit and now we feel it makes sense to cash in a few of our chips.
Bryn Jones is lead manager of the Rathbone Ethical Bond fund