Fixed Income Monthly Comments - June 2023

RAM Global Bond Total Return

Still focused
    
As developed rates markets adjusted to tighter monetary policies, government bonds underperformed this month. Despite higher nominal and real yields, which are now back to their March highs, risk assets performed, which benefitted corporate bonds thanks to tighter spreads. 

There were several central bank meetings in June and all remained focused on curbing inflation back to their target, including the US Fed which paused its tightening as expected. Indeed, despite soft leading indicators, including recently on services, economies have been resilient, particularly the job markets, and progress on inflation is perceived as not sufficient and sometimes disappointing as in the UK. 

How the US Fed communicated the pause at the June meeting was relatively unusual, with their immediate flagging of two potential hikes, which has been effective at repricing expectations in the following weeks. It is quite remarkable that despite a significant increase of real yields since early May, risk assets continued to perform, likely reflecting a relatively defensive positioning, but also positive surprises on the economy and earnings relative to expectations. Under the surface though, higher rates are biting, illustrated by an increase in downgrades or defaults, but thanks to a low starting point and limited refinancing needs for the time being, credit stories have remained idiosyncratic.  
    
As volatility did not materialise during the early days of June, we sold back some protection on Euro High Grade that we had tactically reduced at the end of May to benefit from this low vol environment and the liquidity of the underlying. We replaced some single name bonds with CDS on indices as the credit picture slowly deteriorates to improve the portfolio liquidity. Late in the month, we switched some of our IG CDS into HY as HY lagged somewhat. Overall, our portfolio maintains a high-grade bias, with a 7.5% exposure to high yield. Our traditional portfolio delivered -0.14% (gross of fees).

Our long US treasuries against swaps benefitted from the agreement on the debt ceiling, as well as the ability of the US treasury to replenish its cash balance without draining too much liquidity from the system. We closed the Short OAT asset swap early in the month as spread is quite low ahead of a potential summer widening. The hawkish pause flagged by the Fed and ECB hawkishness played against our long end steepeners in US and Europe. Our non-traditional portfolio delivered -0.20% (gross of fees).

After its May rebound, the USD declined, benefitting the long in BRL and EUR, as well as the NOK, while the SEK had a flat contribution. Our FX exposures, which are diversified and limited in size, remained unchanged this month. Our FX portfolio delivered +0.16% (gross of fees).
        
At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.25% net of fees. The duration stood at 3.39 years and the average credit quality was AA-.

RAM Asian Bond Total Return

Asia Credit: The Sun Also Rises
Overview:
With dust settled for US debt ceiling negotiation, and Fed taking a pause of rate hike in the FOMC meeting of June, market has resumed a risk-on mode which almost lasted the whole month. A surprise 50bps rate hike by Bank of England and strong sets of US economic data pushed US Treasuries yield higher (+50bps in 2-yr UST and +20bps in 10-yr UST), that was largely offset by decent credit spread tightening (-23bps, measured by JP Morgan Asia Credit Index - JACI) especially in High Yield (-96bps). Spread tightening in HY was mainly driven by Sovereign (-686bps) and Asia corporates (-66bps), and most of the corporates tightening was from China (-47bps). As a result, the JP Morgan Asia Credit Index scored a positive total return for the month. 
Positive progress in Frontier Sov Sri Lanka’s and Pakistan’s liability management supported the rally in Sov HY. Meanwhile, concerns that China's economy is losing its momentum from reopening, indicated by disappointing economic data for the month of May, has turned into strong expectations that the government will pull off a package of stimulus policies to boost growth. Such backdrop has supported China property and bad debt managers’ HY bond spreads to tighten. The market in Asia credit managed to outperform global peers (Markit iBoxx USD Asia ex-Japan index was -22 bps vs. US IG which was -13 bps). The Asian primary market was steadier with an Asia ex-Japan bond supply of USD 7.4 BN (USD 9.6 BN in May 2023 and USD 10.9 BN in June 2022). YTD Asia ex-Japan supply is down -39% YoY. 

Outlook and portfolio performance: 
On spread levels, the relative value is still not compelling in Asia credit, with JACI IG-rated corporates’ credit spread difference over US equivalents currently at 52bps, 17bps below last-twelve-months (LTM) average. On HY side, the spread difference over US peers is also not cheap, around 100~150bps lower than 1-year average. We are not convinced by recent rally in China HYs driven by expectations of strong stimulus policy, with a view that policies would only be eased in an incremental manner. Outperformers in June such as bonds issued by China's bad debt manager Huarong may see some headwind in coming months. 
We have been lagging to a small extend to JACI index largely due to underweight in HY, of which the outperformance YTD has been driven by Frontier Sov and China HYs. For now, we are comfortable with the prudent tone given the uncertainties of the Frontier economies such as Sir Lanka and Pakistan, both of which get caught in geopolitical tensions between the West and China. And China itself is still struggling to bring the economy back on track. 
In terms of rates, we still hold the view that rates may stay higher for longer, and to remain defensively positioned in duration with what we saw as better yields in the front-end. Meanwhile, as momentum building up around the July FOMC meeting, if recent spike in US Treasuries yield continue to get closer to extreme levels seen in March, that would become an opportunity to add duration in IG. In that case, we would be looking at Asia Financials, whose spread difference over US peers is 5bps wider than the 1-year average. In particular, we would explore bonds in Japan because Japan A-rated Financials are trading at higher yield than Korea and China A-rated Financials.
The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was down -0.2% in June, underperforming the JACI by 0.5%. The fund has returned +2.3% YTD vs. JACI at +2.92%. The fund remains well diversified. We remain very flexibly invested with a net duration of 3.0 years and 2.6% cash levels, and we would look to rotate out of cash and short-dated Investment Grade bonds and Treasury bills into new IG opportunities or add duration if UST yields appear to peak in the medium-term. 
 

________

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). 

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.
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 KIIDs 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.