5 January 2024
Fixed Income Monthly Comments - January 2024
Global Bond Total Return
Close to, but not yet.
After some correction in the middle of January, rates moved lower to finish the month almost unchanged for a relatively quiet month, with reduced volatility. Developed Markets’ (DM) corporate spreads stayed on the tight side overall, also with little volatility, while Emerging Markets’ (EM) sovereign were slightly wider. DM Equity markets performed again this month, while EM was dragged lower notably by China.
With a disinflation story still ongoing, upward momentum continued on DM risk assets particularly. With spot real policy rates already positive, central banks are now well positioned to achieve a soft landing. Indeed, after ECB, Fed and BOE meetings, the question is less if they cut rates, but when this year, and particularly by how much, as there is a significant amount of rate cuts already priced.
Data released this month show a still sound economy in the US, and some improvements in European leading indicators. However, tight monetary policies keep pressure on some parts of the economy, and the sharp selloff in the New York Community Bank stock at the end of the month is a reminder of potential sources of stress under the surface. This year is also one during which general elections will be held in a large number of countries, which can also generate some volatility.
We used the rates pullback to switch some duration from US rates, where significant rate cuts are priced, into CHF where the curve is much flatter, which keep the Foreign Exchange (FX) carry very compelling, ang GBP where rates experienced a larger correction since the beginning of the year. We also added some duration in MXN and BRL, where real yields are still elevated, while a less restrictive Fed should provide more leeway to EM central banks. As the US IG CDS move back to tight levels, we booked profit on short protections initiated during last October widening. Our traditional portfolio, diversified geographically, delivered a return of -0.03% (gross of fees*).
This month, the long end of the US curve steepened after last month correction, supported also by growing probability of disinflationary rate cuts at least, while the EUR curve steepener was flat. As AUD rates outperformed, we booked profit on the spread between AUD and CAD 5y5y, and closed the position. We started to initiate an Insurance-linked security (ILS) vs USD 5y5y as a new Relative Value (RV) strategy. Our non-traditional portfolio delivered a return of +0.16% (gross of fees*).
During the month, we used some currencies strength against USD to reduce the USD short. We sold some GBP (-0.4%) which held well this month, and some CAD (-0.3%) longs as well. We look to use EUR strength to add to our existing short. Our currency positions are long NOK (2%), BRL (1.81%), MXN (1.05%), TRY (0.95%), IDR (0.75%), SEK (0.65%), CLP(0.55%), JPY(0.36%), against PLN (-0.28%), CHF(-0.53%), SGD (-0.8%), EUR (-2.1%) and USD (-5%). Our FX portfolio delivered a return of -0.08% (gross of fees*).
At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.07% net of fees.** The duration stood at 4.71 years and the average credit quality was A+.***
*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%).
** All fees and expenses, except subscription and redemption fees, are taken into account
*** 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: Off To A Busy Start
• US Fed held policy rate unchanged in the January Federal Open Market Committee (FOMC) and dashes hopes for March 2024 rate cut.
• China cuts required reserve ratio (RRR) by 50bps showing focus to drive the economy.
In January, US Treasury yields experienced a pullback after strong rate rallies in the last two months of 2023. The overall yield curve for US Treasuries bear steepened, with the 2-year/10-year inversion remaining broadly unchanged at -39 basis points (bps), while the 10-year/30-year curve steepened by 3 bps to +17 bps. Specifically, the 2-year US Treasury yield increased by 18 bps to 4.43% last month, and the 10-year Treasury yield rose by 19 bps to 4.07%.
Despite the December Core Personal Consumption Expenditures (PCE) inflation rate of 2.9% year-on-year (YoY) moving towards the Federal Reserve's long-term target of 2%, the Federal Reserve unsurprisingly maintained its policy rate at 5.25%-5.50% during its January FOMC meeting. While comments by the Federal Reserve Chairman Jerome Powell in an interview with CBS 60 Minutes practically cemented the Fed's pivot this year, he cautioned against the risks of moving too early, making a rate cut in March 2024 unlikely. Consequently, the implied probability of a rate cut in March 2024 fell below 20%, as the market shifts its expectations to a potential rate cut later in the year to possibly around the mid-year point. Indeed, the robust state of the underlying economy and labour market are expected to keep the Federal Reserve on the sidelines for a little longer, in our view.
It seems that in January, the Chinese government took various steps to stimulate its economic growth. China's People’s Bank of China (PBOC) made three significant announcements during that time.
Firstly, the PBOC surprised the market by implementing an earlier and larger-than-expected cut in the RRR of 50 bps. This move is estimated to inject approximately CNY 1 trillion of liquidity into the system. Secondly, the PBOC announced the establishment of a new Credit Market Department, whose primary objective is to optimise funding for five specific areas: technology, green economy, small and medium-sized enterprises (SMEs), senior care, and the digital economy. This is in line with the government's focus on ‘quality’ development. Lastly, to improve liquidity and manage refinancing risks in the property sector, the PBOC and the National Administration of Financial Regulation (NAFR) jointly issued a notice to property developers to use bank loans backed by their operating commercial properties to repay existing loans. This measure aims to provide developers with more flexibility in managing their debt obligations and potentially ease refinancing pressures in the property sector.
Meanwhile, the outcome of Taiwan's election in January was largely status quo. Mr. Lai Ching-Te from the pro-independence party Democratic Pro-Party (DPP) won the Presidential Election while no single party won majority in the Legislative Yuan. Indonesians will go to the polls on February 14th to elect a new President.
The Asian dollar primary pipeline remained active as issuers sought to secure their funding needs early. In total, there were USD 20.6 billion worth of dollar bonds issued during the month, an increase of 17.7% YoY.
The benchmark JP Morgan Asia Credit Index (JACI) posted a +0.26% total return.**** The index's blended spreads narrowed 12 bps to 210 bps. The Asia Non-Investment Grade bucket outperformed with +2.67% total return while the Investment Grade bucket had a slight negative return of 0.12%.
Outlook and portfolio performance
• Optimism for 2024 underpinned by robust fundamentals, positive technical and the US Fed pivot.
• Add risk and extend portfolio duration.
In our previous monthly update, we mentioned that we intended to add duration and risk to the portfolio. We have now executed this strategy by rotating out of shorter duration credits and investing into longer duration credits in Australia, Malaysia, Thailand, and Indonesia. As a result, we increased the portfolio duration by 0.5 turn to 3.7 years. Although there was active issuance in the primary market, we were selective in our participation due to the limited new issue premium offered in most deals. Our approach remained disciplined, focusing on credits with strong fundamentals and aligning with the themes we favour.
In 2024, there is a consensus that the US will implement a rate cut, which could benefit Asia credits. Asia's economic and corporate fundamentals are considered strong. Additionally, positive technical factors are expected to support Asia credit. The market predicts a third year of net negative supply in Asia credit, which could boost sentiment. Furthermore, the end of the cycle in China property defaults may further bolster positive sentiment. Global investors are said to be underweight Asia, suggesting potential inflows to the region.
The recommendation is to opportunistically extend the portfolio duration and yield. Based on the view of US rates, the expectation is for Asia credit yield and spread curves to bull flatten. To enhance the portfolio yield and return, a rotation out of the front end of the curve and into selective High-Yield opportunities is suggested.
In January, the RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) saw a positive performance of +0.28% (net of fees*****), slightly outperforming the JACI index which had a return of +0.26%. The fund maintains a well-diversified portfolio with a net duration of 3.7 years, which is lower than the index duration of 4.3 years. Additionally, the fund held a cash level of 0.3% at the end of the month.
For a complete overview on 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
For a complete overview on the fund performance, please click on the above-mentioned links in this document.
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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