Fixed Income Monthly Comments - August 2024

Global Bond Total Return

Clearly pivoting

A sharp risk off move occurred during August early days, with the Nikkei down sharply while the Japanese currency appreciated strongly, likely triggering liquidation of consensual positions at the peak of summer illiquidity. At the end of the month, Developed rates remain lower, while equities have recovered their losses, and credit spreads are back to the tights.

The US Federal Reserve held its meeting the last day of July, and the Jackson Hole symposium during August. It is clear now, particularly after Jackson Hole, that they have strong confidence that inflation will continue to converge towards their target, and now has come the time to move the policy rate from restrictive towards, at least, a more neutral level. What is also significant was the emphasis of Mr Powell that the Fed is not targeting or welcoming further cooling in labor market, shifting the focus from inflation to jobs data, and clearly pivoting.

The move was expected, and also relatively priced since May highs in yields. It now depends on data to see if larger and faster cuts than the 200 bps expected will be needed, as so far there is little visible stress in financial markets, while private balance sheets are in relatively good shape, contrary to several sovereigns. As we move closer to the autumn, the US election will become a larger focus, with a still unclear outcome.

As rates declined quickly, we booked profits on duration added since Spring on liquid quality products such as Gilts, Bunds and US Swaps, reducing tactically our duration to 4 years as rate cuts expectations are again elevated. Our duration is mainly in Europe (Euro, CHF and GBP), and less in USD. Our credit exposure has been maintained overall in our traditional portfolio, with high-yield (HY) exposure kept at 8%. Our traditional portfolio benefitted from the rates decline and the stable spread environment, delivering a return of +0.97% (gross of fees).*

As credit spreads widened in August early days, we added credit risk by booking profits on the short EUR credit leg of the Short EUR IG against long US IG. As spreads moved back quickly to the tights later in the month, we bought back the protection on EUR IG at cheaper levels, as we do not expect spreads to make new lows quickly. We have kept the 10y vs 30y curve steepener in US and EUR as the coming cuts should continue to support the strategies, especially if data justify deeper rate cuts. Our curve steepeners in EUR and USD performed this month, as well as the Europe vs US IG spread, while the USD Asset swaps detracted a little. Our non-traditional portfolio delivered a return of +0.05% (gross of fees).*

As TRY carry has outperformed the currency depreciation YTD, leading to a significant increase in the trade weighted value of the currency, we decided to book profit on the position, as inflation remain quite elevated, while the currency may become somewhat more vulnerable. Our currency positions are long NOK, BRL, MXN, SEK, IDR against USD, EUR, and SGD. Our FX portfolio delivered a return of  +0.16% (gross of fees).*

At the end of the month, RAM (Lux) Tactical Funds – Global Bond Total Return Fund’s (Class B USD)  delivered +1.19% net of fees. The duration stood at 4 years and the average credit quality was A+. **

For a complete overview of 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.

RAM Asia Bond Total Return

Overview The Time Has Come …

•       US Fed set to cut in September

The month of August began with considerable volatility. However, since the first week, the markets have stabilized, recovering much of the damage incurred earlier. The US S&P index finished August up by 2.3%, while the VIX retreated to 15 after peaking at a four-year high earlier in the month. The Nikkei 225 remains 1.0% lower than its beginning of the month level. Asia ex-Japan IG CDS closed at 93.5, down from an August high of 104. Additionally, Asia cash credit spreads widened slightly by 4 basis points for the month, achieving a total return of 1.63% due to favorable movements in interest rates.

 Last month, the US Treasury yield curve experienced a bull steepening, with the front-end 2-year yield dropping by 34 basis points to 3.92%, compared to a 13 basis point decline in the 10-year yield, which fell to 3.90%. As a result, the 2-year to 10-year inversion narrowed from -23 basis points at the end of July to -1 basis point last month. Additionally, the 10-year to 30-year spread increased by 2 basis points, reaching 29 basis points.

 While the US Federal Reserve is expected to begin cutting rates this month, expectations for central bank policy rates in Asia are more mixed. Apart from the central banks of New Zealand and the Philippines, most Asian central banks kept their rates unchanged last month. Looking ahead, the Bank of Korea and India's Reserve Bank of India may consider easing next, whereas Thailand and Indonesia are likely to maintain their current positions. Inflation and financial stability are key factors influencing monetary policy decisions in the region.

 The pace of new issuance in the Asian primary market slowed once again last month. There were USD 8.3 billion in new issues in the Asia ex-Japan US dollar credit market, down from USD 10.0 billion in July. Consequently, total new issuance year-to-date rose to USD 87.4 billion, reflecting a year-over-year increase of 23%.

The J.P.Morgan. Asia Credit Index (JACI) recorded a total return of 1.63% last month, largely driven by movements in US rates. During this period, blended spreads in Asian credit narrowed by 4 basis points, ending the month at 160 basis points. Year-to-date, JACI has returned 5.87%.

 Outlook and Portfolio Performance

•       Asia credit remains resilient

A confluence of factors contributed to the volatility in August, leading to sharp carry-trade unwinds. These included a significant repricing of US recession risks following weak job data, the Bank of Japan's sudden hawkish stance, upcoming US elections, and heightened geopolitical tensions in the Middle East. However, as noted in our previous commentary, Asian credits remained relatively resilient. This resilience can be attributed to robust liquidity in the region, low leverage, and a net negative supply technical backdrop, all underpinned by sound fundamentals.

 As anticipated, the Asian primary market slowed last month due to volatile market conditions. However, we expect the pace to pick up as we enter the last quarter of the year, particularly given the current lower interest rate levels. We foresee Asian corporations taking advantage of this opportunity to proactively manage their liability profiles.

 We continue to implement our strategy of remaining nimble on duration while focusing on bottom-up credit selections to enhance portfolio yield and returns. The portfolio is underweight the long end of the curve relative to the index, which we consider appropriate given the steepening bias of the US Treasury curve.

Last month, the RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund’s (Class PI USD net of fees****)  yield was 5.9%, compared to the index's 5.6%. The portfolio duration increased from 3.7 years to 4.0 years, while JACI's duration stands at 4.4 years. The portfolio returned 1.44% in August, with a year-to-date total return of 4.76%. At the end of the month, the portfolio held 3.1% in cash.

For a complete overview of the fund performance, please click on the above-mentioned links in this document.

*** 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.

**** All fees and expenses, except subscription and redemption fees, are taken into account

Important Information

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 Fund is 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-Fund 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-Fund apply a performance fee. Leverage intensifies the risk of potential increased losses or returns.

The Management Company 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 Information Document and prospectus with special attention to the risk warnings before investing. This Sub-Fund is classified as art.6 SFDR. For further information on ESG, please refer to

https://www.ram-ai.com/en/regulatory-information and the relevant Sub-Fund webpage, section "Sustainability-related disclosures".

The prospectus, constitutive documents and financial reports are available in English and French while IIDs 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.

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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, Mediobanca Management Company S.A. 2 Boulevard de la Foire, 1528, 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.