8 September 2023
Fixed Income Monthly Comments - August 2023
RAM Global Bond Total Return
In August, US interest rates gradually returned to their 2022 highs, driven by positive economic data. In contrast, Europe saw disappointing economic performance. As the markets shifted towards a ‘higher for longer’ scenario during the month, risk assets consolidated.
As is customary in August, major central bank leaders gathered at the Jackson Hole symposium. This event often serves as a platform for them to announce their policy inclinations. This year's message held no surprises. After an extensive tightening campaign spanning the past 18 months, systematic interest rate hikes are largely complete. However, with current inflation levels still not at their target, or notably softer, monetary policy decisions remain data-dependent, with a hawkish bias.
The latest data, particularly in the US, confirmed the soft landing that financial markets had priced in, with signs of labour market softening, a development central banks find reassuring as it helps avoid further economic stress. Nonetheless, with higher real yields, the policy path is becoming narrower as premiums decrease, with credit spreads remaining relatively tight, and equities near their highs.
With the soft landing largely priced, we booked tactical profits on US Investment Grade CDS and on some of our short protection positions on EUR Xover CDS. We slightly increased the duration in US 7-year, GBP 2-year and 4-year, as rates have repriced in both countries to reflect a ‘higher for longer’ outlook. As MXN rates returned to the high end of YTD range, we purchased some 6-year government bonds, given their restrictive monetary policy, without currency risk for the time being as we expect some mild correction. With potential risks on the horizon for the DM credit space due to restrictive monetary policies and a deteriorating credit cycle, we aim to diversify our risks into emerging market local bonds with robust fundamentals, especially those offering attractive real rates. During August 2023, our traditional portfolio delivered a return of +0.02% (gross of fees*).
The yield curves steepened during the month, signalling that we are in the late stages of the tightening cycle, which benefitted our long-end steepener positions (10y vs. 30y) in the US and Europe. With spreads stable this month, our long US Treasuries versus swaps positions benefitted from its positive carry. Our non-traditional portfolio delivered a return of +0.14% (gross of fees*).
As expectations for US interest rate cuts have been pushed further into the future, the repricing of the term structure benefitted the USD against most currencies. We took advantage of a pullback in BRL to increase our exposure, as high real interest rates offer good protection and a decent carry. Having reduced our positions in the SEK last month, we utilised the pullback in the NOK to add to our exposure, as Nordic currencies remain relatively inexpensive on a trade-weighted basis, even though monetary policy has not yet turned restrictive. Our currency positions are long BRL (1.4%), SEK (0.57%), EUR (0.53%), AUD (0.31%), NOK (0.49%), MXN (0.13%) against USD. Our FX portfolio delivered a return of -0.06% (gross of fees*).
In August 2023, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.01% net of fees***. The duration stood at 3.69 years and the average credit quality was AA-.**
For a complete overview on the fund performance, please click on the above-mentioned links in this document.
RAM Asia Bond Total Return
Asia Credit: Turning Point
The month of August saw some of the worst weeks year-to-date (YTD) for the Asia credit market in terms of performance, with the benchmark, JP Morgan Asia Credit Index (JACI), reporting a -0.92% loss in total return.**** On the 21st of August, in the US, the 10-year Treasury yield touched the highest level since 2007, at 4.35%, and stayed above 4% towards the end of the month. Investors are still concerned that interest rates could remain higher for longer than anticipated after economic data showed the US economy has been more resilient than expected. In Asia, China is in the spotlight after Country Garden - one of the country’s largest developers - missed coupons on its offshore bonds (later remedied in early September within the grace period to avoid an outright default). These developments added downward pressure not only on China's property bonds, both High Yield (HY) and Investment Grade (IG), but also impacted China's financials, especially the AMCs (bad debt managers) and Hong Kong property developers that were exposed to the mainland China market in varied degrees. However, the Country Garden event is also proving to be a turning point for the Chinese government’s policy towards the property sector. A series of easing measures were announced since and fueled a 0.63% rebound in the JACI index in the final week of August, mostly helped by a 1.8% rebound in HY.
Month-on-month UST belly and long-end yields ended up higher (+8bps in 5-yr, +15bps in 10-yr UST), while front-end yields remained mostly unchanged (-1bps in 2-yr UST). For Asia Credit, with the index duration at ~4.4, the US rates moved wider and put more pressure on the JACI index, which was suffering from a significant credit spread widening (+20bps), especially in High Yield (+118bps), while Investment Grade was not immune (+10bps). As a result, the JP Morgan Asia Credit Index scored a negative total return for the month. The Asian primary market was muted with an Asia ex-Japan bond supply of USD 5.7 BN (USD 6.5 BN in July 2023 and USD 5.2 BN in August 2023). YTD, Asia ex-Japan supply is down -36% YoY.
Outlook and portfolio performance:
Our cautious view to not chase the strong rally earlier in the year for China HYs driven by optimistic expectations for the early release of strong stimulus policy, turned out to be realistic and helped the fund outperform the JACI index. After the selloff this month, on spread levels, the relative value has become more attractive in Asia credit. JACI IG-rated corporates’ credit spread difference over US equivalents stood at 70bps, 10bps above the last-twelve-months (LTM) average, and improved by 20bps compared to the end of July. On the HY side for B-rated space, the spread difference over US peers is much cheaper, around 20bps higher than the LTM average level, and improved by 150bps since July. On the BB-rated space, however, the spread difference over US peers is still not cheap, around 200bps lower than the LTM average level.**
Before August, the fund was lagging to a small extent compared to the JACI index, largely due to the fund’s underweight in HY, of which the performance has been driven by Frontier Sovereigns such as Sri Lanka and Pakistan, and China HYs. Additionally, the fund has a shorter duration than the JACI index, contributing to the small underperformance because the US rates front-end underperformed long-end earlier in the year (before July) with the UST curve inverted. Last but not least, in response to the US rates move, the IG credit spread in the long-end tightened more than the front-end with the latter being capped by high front-end risk-free rate levels. After the China HY selloff in July and August, and now that the US rates curve bear steepened further, the fund performance is catching back up to outperform the index, especially with the US 10-year Treasury yield touching its highest since 2007.
In terms of rates, we still hold the view that they may remain higher for longer. While we remain defensively positioned in duration, we see value emerging in the belly and, to some extent, in the 10-year part of the UST curve after recent significant bear steepening in the past two months. Regarding the credit basket, we would still be looking at Asia Financials, with their spread difference over US peers turning more attractive after the selloff in August, at 25bps wider than the last twelve-month (LTM) average. While we would continue to explore bonds in Japan due to cheap valuations as their A-rated Financials continue to see new supplies, Korea and China's A-rated Financials are becoming interesting again after spreads widened in August. In particular, Korean Financials’ valuation weakness in August was driven more by technical than fundamentals.
The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD – net of fees) fund was down -0.18% in August 2023, outperforming the JACI by 0.74%. The fund has returned +2.46% YTD vs. JACI at +2.24%. The fund remains well diversified. We remain very flexibly invested with a net duration of 3.3 years and -0.72% cash levels. The negative cash level was temporary on redemptions. We would look to rotate out of short-dated Investment Grade bonds into new IG opportunities or add duration in the 2-5 years range as UST yields appear to peak in the medium-term.
For a complete overview on the fund performance, please click on the above-mentioned links in this document.
*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%).
** 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.
*** All fees and expenses, except subscription and redemption fees, are taken into account.
**** 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.
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.
This document has been drawn up for information purposes only. It is neither an offer nor an invitation to buy or sell the investment products mentioned herein and may not be interpreted as an investment advisory service. It is not intended to be distributed, published or used in a jurisdiction where such distribution, publication or use is prohibited, and is not intended for any person or entity to whom or to which it would be illegal to address such a document. In particular, the products mentioned herein 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). The opinions expressed herein do not take into account each customer’s individual situation, objectives or needs. Customers should form their own opinion about any security or financial instrument mentioned in this document. Prior to any transaction, customers 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. The information and analyses contained in this document are based on sources deemed to be reliable. However, RAM AI Group cannot guarantee that said information and analyses are up-to-date, accurate or exhaustive, and accepts no liability for any loss or damage that may result from their use. All information and assessments are subject to change without notice. Investors are advised to base their decision whether or not to invest in fund units on the most recent reports and prospectuses. These contain further information on the products concerned. The value of units and income thereon may rise or fall and is in no way guaranteed. The price of the financial products mentioned in this document may fluctuate and drop both suddenly and sharply, and it is even possible that all money invested may be lost. If requested, RAM AI Group will provide customers with more detailed information on the risks attached to specific investments. Exchange rate variations may also cause the value of an investment to rise or fall. Whether real or simulated, past performance is not necessarily a reliable guide to future performance. The prospectus, key investor information document, articles of association and financial reports are available free of charge from the SICAVs’ and management company’s head offices, its representative and distributor in Switzerland, RAM Active Investments S.A., Geneva, and the funds’ representative in the country in which the funds are registered. This marketing document has not been approved by any financial Authority, it is confidential and its total or partial reproduction and distribution are prohibited. 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 Management Company RAM Active Investments (Europe) S.A., 51 av. John F. Kennedy L-1855 Luxembourg, Grand Duchy of Luxembourg. The reference to RAM AI Group includes both entities, RAM Active Investments S.A. and RAM Active Investments (Europe) S.A.