Fixed Income Monthly Comments - August 2023

RAM Global Bond Total Return

Data dependency

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

Overview:

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.

Important Information

*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). 

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