14 January 2022

Fixed Income December 2021 Review

RAM Global Bond Total Return Fund

Herd immunity in sight?

In a reversal of last month moves, markets closed the year with a risk-on tone. Yields moved up, while risk assets outperformed, including corporate debt as spreads tightened.

We have learned during the second half of the month that even if Omicron is able to spread extremely fast, it is likely to be relatively mild. If that is confirmed, it is likely to be a positive news, as the world will more easily reach herd immunity, but thanks to infection, and not vaccination. This situation will give politics and monetary authorities more leeway to continue to withdraw the stimulus, as announced. Due to the versatility of this virus, they will remain prudent, but they will be more confident to be able to do so. Indeed, one of this year conundrum has been the extremely low, and stable, real yields, despite an inflation outlook that has deteriorated markedly in the second half of the year. Even if there are structural reasons such as aging population and very high level of public debt to explain these low yields, their relative inelasticity can also be explained by the grip that central banks have acquired on bond yields due to their respective purchases, as they hold between one third and a half of the sovereign debt in developed economies. It is then likely that we see a slow but consistent normalization of these real yields in the months to come.

Accordingly, we have taken advantage of the yield decrease in USD and Europe during the month to continue to reduce our duration in those areas, and expand it in China, where real yields are positive while the economy is likely to remain constrained by their Covid strategy and the real estate crisis. We have also taken advantage of wider credit spreads to sell protection, a liquid exposure to risk assets, bringing our High yield exposure to 10%. Our traditional portfolio delivered +0.34% this month (gross of fees)

As curves corrected their recent flattening due to recent extremely flat levels reached, both the Euro and US steepener outperformed. As rates moved up in Europe, our compression strategy between Austria 100year and Germany 30yr outperformed. Our non-traditional portfolio delivered +0.07% (gross of fees).

As the USD corrected some of its recent strength, most of our exposures performed. We reduced our RUB and JPY long during the month due to potential vulnerabilities, for different reasons. We remain long SEK, NOK, CAD, JPY, and RUB, short EUR and USD. Our FX portfolio delivered +0.04% (gross of fees). The duration stood at 2.33 years and the average credit quality was A+.


RAM Asia Bond Total Return Fund

The Unexpected

2021 was an unexpected year to say the least in Asian credit and fixed income. Leave aside, the wild interest rate swings in the year and fluctuating macro narratives, at a micro level Asia credit experienced bouts of challenges in various parts of its universe across the year. Amongst the dispersion pushing events we had “list/sanction” names, rates impacting Asia EM several times, India COVID scare, China tech woes, China Huarong incident and perhaps the most significant, the collapse of the China property sector. It’s interesting to think back to early 2021, where many Asia credit pundits picked China HY property as the highest value sector. It’s also clear that the dispersion between sub-areas of the JACI were notable in 2021 (i.e. JACI Financial 2021 return +1.1% vs. JACI Corporate [exfin] HY -17.0%.)  

With regards to December, the month began weakly on Omicron concerns but over the month these concerns waned. This and the traditional year-end rally, catalyzed a steady month for risk assets with spreads tightening broadly in Asian credit but offset by the selloff in interest rates, from the very sharp lows coming in to December.

In the Asia credit markets, the market rallied broadly over the month but pressure remained in China property, specifically with bell-weather Shimao closing sharply lower from mid-month highs. The path still remains murky in China property and Asian credit.

With regards to performance (JACI), JACI posted a negative return of -0.2%, driven by interest rates. At year end, the Asia High Yield return sits at 11.0% whilst Investment Grade is at -1.4%. The benchmark JACIs YTD return was -2.4%. 

Outlook and portfolio performance:

On spread levels, the relative value continues to remain in Asia credit both in IG and HY but trajectory in the China property sector, needs to still be continued to be monitored. Again, similar to last year, developments in China policy will be a key driver of opportunities. We still remain cautious due to the policy uncertainty and conversely, COVID developments which have returned to the forefront. The COVID developments are specifically challenging for the countries pursuing a zero COVID policy within Asia.

With regards to 2022, we start the year very cautiously positioned due to the continued uncertainty in the China property sector, COVID challenges persisting and importantly, what we see as the possibility for a sharp move higher in interest rates to start the year (real yields are very telling.) The fund remains well diversified. We remain flexibly invested with a net duration of 3.2 years and 14.8% cash levels, and we would look to rotate out of cash and tightly traded Investment Grade bonds into new issues or China property on stabilisation and at some time add duration.

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