Fixed Income Monthly Comments - April 2024

Global Bond Total Return

More conservative

During April, rates moved significantly higher in both Developed Markets and Emerging Markets as growth and inflation data continued to surprise on the upside. Credit spreads, already tight, experienced some volatility but closed the month almost unchanged. Equities on the other hand, particularly in the US market, corrected after a very strong year-to-date performance.

Since the beginning of the year, the US economy has remained very resilient, notably the job market and domestic demand. Stalled progress on inflation has prompted the Fed Chairman in April to adopt a more prudent and patient approach than initially expected, which contrasts with the stance taken as recently as the March Federal Open Market Committee (FOMC) meeting. Even in Europe, where expectations are for positive but weak growth, data has picked up slightly, confirming the improvements visible in recent manufacturing and services purchasing managers indexes, while growth has also been revised higher in some EM countries.

Consequently, rate cut expectations are now more conservative, with policy rates expected to be around 4.5% in the US next summer, and around 3% in Eurozone. It is possible for the market to reprice further and remove further cuts, especially as resilient risk assets keep financial conditions broadly supportive despite the recent move up in yields. However, monetary policy rates are already restrictive in most countries, and the current repricing higher in long-end forwards is likely to constrain the economy and lessen inflation pressures later.

We had reduced since January our duration when rate cut expectations were large and negative carry expansive. Levels are now becoming more attractive over the medium term, notably in the eurozone, with less rate cuts expected and slightly higher long-term equilibrium yields, reason why we started to increase our Euro duration at the end of the month. As spreads remain tight, despite higher uncertainties on inflation and growth outcome, we closed some long credit built by selling protection on Itrax Main (Euro IG), looking to enter again should some volatility and wider spreads materialise. We have kept our High Yield exposure broadly unchanged at 10.5%. Our traditional portfolio detracted -1.23% (gross of fees).*

With a more conservative and delayed policy path expected, the yield curve flattened further this month. We keep the exposure to long-end steepening strategies, mainly in Europe and to a lesser extent in the US, as levels are attractive and offer good potential. We started to build some short France vs Germany, as fiscal policy is a long-term concern globally, likely to become a hotter topic in the next economic downturn as some countries have not been able to follow a credible path of fiscal consolidation. Our non-traditional portfolio delivered a return of -0.32% (gross of fees).*

Our shorts in EUR and CHF supported the FX portfolio performance, in a month characterised by a broad USD strength. Our currency positions are long NOK, BRL, TRY, SEK, MXN, IDR against, CHF, SGD, EUR, and USD. Our FX portfolio delivered a return of +0.05% (gross of fees).*      

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund  (Class B USD) delivered -1.60% net of fees.** The duration stood at 4.15 years and the average credit quality was A+.***

*The performance is gross of management fees and operational costs (0.60% management fee and 0.40% of operational costs, for a TER of approximately 1%).

** All fees and expenses, except subscription and redemption fees, are taken into account
*** Credit Rating: is a parameter used by banks and lending institutions to determine whether an applicant is deserving of the confidence necessary for the granting of a loan. This parameter makes it possible to measure the risk of consumer default and determine the economic conditions applicable to consumers. The highest rating is indicated by the letters: AAA. This is the indication of highest financial security. This is followed by: AA, A, BBB, BB, etc. The lowest credit rating corresponds to the letter C. This letter identifies a high risk of financial default and is a figure taken into great consideration by each lending institution.

RAM Asia Bond Total Return

Overview: China Steps Up Support

• US rates volatility picks up as market reprices timing of rate cut

In the past month, there was increased volatility in US interest rates due to higher-than-expected inflation data for the third consecutive month. The US FOMC decided to keep its policy rates unchanged at 5.25%-5.50%, and comments from Federal Chairman Powell alleviated concerns of resuming hiking cycle. Consequently, US Treasury yields experienced significant fluctuations. The 10-year yield initially rose by 41 basis points, nearing 4.7% by the end of April, but later retreated by 11 basis points to 4.50% following softer employment data in April.

Given the potential implications of the US ‘higher-for-longer’ mantra, central banks in Asia will closely monitor the situation. They will assess the impact on their economies, including exchange rates, inflation dynamics, capital flows, and overall financial stability. Central banks will be prepared to adjust their monetary policy measures as needed to maintain stability and effectively address any emerging risks that may arise from a stronger US dollar or other related factors.

In the case of Indonesia, Bank Indonesia made a surprising move in April by raising its policy rate by 25 basis points to 6.25%. This decision was motivated by the aim of stabilising the Indonesian currency. In contrast, the Reserve Bank of India (RBI) opted to keep its policy rate unchanged during the general election month.

China's recent quarterly Politburo meeting reaffirmed the government's commitment to pro-growth and pro-reform policies. One notable outcome of the meeting was the emphasis on coordinating and studying measures to reduce housing inventory and optimise new home sales. Market participants are now looking forward to the Third Plenum scheduled for July, where further supportive measures may be announced. However, the physical property market in China remains weak.

Despite the volatility in US interest rates, credit spreads in Asia tightened. The J.P. Asia Credit Index (JACI) recorded a negative total return of -1.17% last month, largely driven by adverse spread movements contributing to a negative total return of -1.5%.**** However, blended spreads in Asia credit tightened by 11 basis points during the period, reaching 221 basis points.

The primary credit market in Asia experienced another active month, with total primary issues reaching USD 10.1 billion. This figure represents an increase from USD 9.8 billion in the previous month and USD 6.9 billion from a year ago. Notably, there was a significant gross new issuance of High-Yield corporate bonds, totalling USD 5.1 billion, which served to counterbalance the slower Investment Grade issuance during this period. As of now, the year-to-date total new supply stands at USD 47.4 billion, marking a marginal 2% decrease compared to the corresponding period last year.

Outlook and Portfolio Performance

•Remain nimble on relative value opportunities to pick value and add duration

The overall outlook for Asia credits remains positive, both in terms of fundamentals and technical aspects. While concerns persist regarding the China property sectors, most Asia corporate earnings have been encouraging, indicating a stable credit profile and sufficient liquidity for these companies. Additionally, access to liquidity remains robust, with Asian issuers, including those in the non-investment grade segment, finding increasing opportunities in the offshore capital market.

Last month, the portfolio took steps to increase its overall yield by selectively increasing exposure to the non-investment grade segment. This resulted in a 50 basis points increase, bringing the portfolio's yield to 6.4%. The duration of the portfolio was slightly reduced by 0.2 years to 3.7 years. The portfolio outperformed the J.P. Asia Credit Index (JACI) by 10 basis points during the period. These adjustments reflect the portfolio's successful response to the positive outlook for Asia credits.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund  (Class PI USD net of fees*****) returned a negative total return of -1.06% and outperformed the JACI; -1.17%. The fund returned -0.13 basis points year-to-date compared to JACI at +0.24%. The fund maintains a well-diversified portfolio with a net duration of 3.6 years versus the index duration of 4.3 years. Additionally, the fund held a cash level of 0.2% at the end of the month.

For a complete overview on the fund performance, please click on the above-mentioned links in this document.

**** The fund is managed without reference to a specific benchmark. The Index used is not intended to be a restrictive definition of the investment universe. The composition of the fund's portfolio may differ significantly from that of the benchmark index.

***** All fees and expenses, except subscription and redemption fees, are taken into account

For a complete overview on the fund performance, please click on the above-mentioned links in this document.

Important Information

The RAM (Lux) Tactical Funds – Global Bond Total Return is a Sub-Fund of RAM (Lux) Tactical Funds a Luxembourg SICAV with registered office: 14, Boulevard Royal L-2449 Luxembourg, approved by the CSSF and constituting a UCITS (Directive 2009/65/EC).
The RAM (Lux) Tactical Funds II – Asia Bond Total Return is a Sub-Fund of RAM (Lux) Tactical Funds II, a Luxembourg SICAV with registered office: 14, Boulevard Royal L-2449 Luxembourg, approved by the CSSF and constituting a UCITS (Directive 2009/65/EC). 

Please note that the share classes mentioned in this document may not be registered in your country of domicile. 

This marketing document is only provided for information purposes to professional clients, and it does not constitute an offer, investment advice or a solicitation to subscribe shares in any jurisdiction where such an offer or solicitation would not be authorised or it would be unlawful. In particular, the Funds are not offered for sale in the United States or its territories and possessions, nor to any US Person (citizens or residents of the United States of America).
This document is confidential and is intended only for the use of the person to whom it was delivered; it may not be reproduced or distributed.
There is no guarantee that the holdings shown will be held in the future. The investment described concerns the acquisition of shares in the Sub-Funds and not in a specific underlying asset.
Past performance is not a guide to current or future results. There is no guarantee to get back the full amount invested. The performance data do not take into account fees and expenses charged on subscription and redemption of shares nor any taxes that may be levied. As a subscription fee calculation example, if an investor invests EUR 1000 in a fund with a subscription fee of 5%, the investor will pay to his financial intermediary EUR 50.00 on the investment amount, resulting with a subscribed amount of EUR 950.00 in fund shares. In addition, potential account keeping costs (by investor’s custodian) may reduce the performance. Some shares in the Sub-Funds apply a performance fee. Leverage intensifies the risk of potential increased losses or returns.
RAM Active Investments may decide to terminate the marketing arrangement in place in any given country in accordance with Article 93a of Directive 2009/65/EC.
Changes in exchange rates may cause the NAV per share in the investor's base currency to fluctuate.
Particular attention is paid to the contents of this document but no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof.
Prior to any transaction, clients should check whether it is suited to their personal situation, and analyse the specific risks incurred, especially financial, legal and tax risks, and consult professional advisers if necessary.
Please refer to the Key Investor Information Document and prospectus with special attention to the risk warnings before investing. For further information on ESG, please refer to https://www.ram-ai.com/en/regulatory-information and the relevant Sub-Fund webpage.
The prospectus, constitutive documents and financial reports are available in English and French while PRIIPs KID are available in the relevant local languages. These documents can be obtained, free of charge, from the SICAVs’ and Management Company’s head office and www.ram-ai.com, its representative and distributor in Switzerland, RAM Active Investments S.A. and the relevant local representatives in the distribution countries.
A summary of Investors’ rights is available on: https://www.ram-ai.com/en/regulatory-information
Issued in Switzerland by RAM Active Investments S.A. which is authorised and regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA). Issued in the European Union and the EEA by the authorised and regulated Management Company, RAM Active Investments (Europe) S.A., 51 av. John F. Kennedy L-1855 Luxembourg, Grand Duchy of Luxembourg.
The source of the above-mentioned information (except if stated otherwise) is RAM Active Investments and the date of reference is the date of this document.