15 November 2021
Dispersion across asset classes was elevated in October. US and European equities rebounded strongly, but corporate spreads, already relatively tight, widened slightly. Rates markets saw a significant dispersion, with an impressive flattening of yield curves.
Indeed, over the course of October, some central banks abruptly changed tact, flagging concerns that inflation might last longer than expected. Even if pressures have intensified lately, they were already elevated during the summer when most of the same central banks advocated patience and accommodation. None of the three major central banks have sent such a hawkish message so far, nevertheless this abrupt change has clearly surprised the consensus, and generated a sharp repricing of policy paths, mostly due to positioning.
The reality is that the situation is fluid. The economy is still impacted by Covid-19, but this year significant disruptions still exist on the supply side, while demand remains strong. There are also significant statistical distortions which complicates the analysis of wages real dynamics for example, and a base effect that magnifies the inflation bounce. To some extent, after years of relatively stable indicators for most economies, we are witnessing more volatility on that front, but if the central banks do not panic, real yields should remain accommodative, supporting the economy.
Globally, our portfolio has been positioned for patient central banks in front of good growth, with a moderate duration. We made some adjustments on some exposures, without changing the philosophy of the strategy. At the beginning of the month, we used the spread widening to sell protection on Euro and US IG and HY CDS. As long-term rates stayed low in Europe, we reduced our exposure on this segment, also sold some 30y Germany futures, and reduced our USD EM IG as some bonds held up well. Our traditional portfolio delivered -0.61% (gross of fees).
We closed the CAD steepener at the beginning of the month, as we saw less scope for it after the September steepening. With the selloff concentrated in maturities below 10 years, our steepeners in US and Europe suffered, as well as our Austria 100y against Germany 30y. Due to extreme levels reached, and attractive carry, we have kept those positions. Our non-traditional portfolio delivered -0.28% (gross of fees).
In the FX book, our positioning did not change during the month. The long RUB and NOK performed, as well as the short EUR, while the short CNY and long JPY detracted from performance. Our FX portfolio closed the month flat (gross of fees).
At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -1.00% net of fees for the month. The duration stood at 3 years and the average credit quality was A.
Source: RAM Active Investments
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