15 December 2021
by Gilles Pradère

Change tack


Diverging comments, plus a new variant

Caught between the resurgence of Covid risk and a growth supportive environment, markets closed the month with a risk off tone, with equities lower and credit spreads wider. Rates declined from their highs, allowing good quality assets to outperform this month.

Despite the ECB and the Fed underlining that current high inflation is mostly transitory earlier in the month, rates markets reacted anxiously to the latest inflation prints, and continued to expect some faster monetary policy response. Diverging comments by some other board members only exacerbated these moves, allowing a continuation of the curve flattening. Later in the month, the Fed chairman announced that the end of asset buying will likely come earlier. Indeed, also because of central banks asset purchases, long term yields remain relatively low in front of good growth and high inflation prints, a situation that continues to support growth.

To some extent, rates markets have in previous months anticipated this move, with already three hikes priced for 2022. The consequence for risky assets is less obvious in the medium term, supported by very low real yields, but volatility should be more elevated. Clearly, the challenge for central banks now is to move those real yields from their current historical lows to more normal levels.

With a challenging environment for duration, we have used the yield decline this month to further reduce this risk in USD on intermediate maturities. As yields in EUR remain low, we also closed some exposures in EM IG that have kept tight spreads. We tactically managed our credit risk via CDS, buying back some protection short in IG and HY as spreads have remained tight despite the Covid risk. The USD portfolio contributed positively, while the EUR portfolio with a low duration detracted due to credit spread widening. Our traditional portfolio delivered -0.12% this month (gross of fees).

The long USD treasuries vs swaps outperformed this month. With curves remaining relatively flat, the EUR steepener underperformed slightly. Our long Austria 100y against Germany 30y underperformed this month, underlining some dislocations in rates markets, as the credit spread itself is very stable. We have kept the position as we think this dislocation will come back, and it is an interesting gamma play on rates to have. Our non-traditional portfolio delivered -0.10% (gross of fees).

With a strong USD broadly this month, and a risk off tone at the end of the month, our long SEK, NOK, RUB and CAD detracted some performance. The short EUR performed, as well as the long JPY. Our FX portfolio delivered -0.12% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.41% net of fees. The duration stood at 2.7 years and the average credit quality was A.


Source: RAM Active Investments

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