8 September 2023
Fixed Income Monthly Comments - October 2023
RAM Global Bond Total Return
Beyond geopolitical risks
In October, rates followed different paths, rising in Japan and US, while declining in Europe. Credit spread widened somewhat, while equities underperformed, due to a combination of higher US rates and geopolitical stress.
The tragic events in the Middle East dominated investors’ concerns during the first half of the month, with a low but non-negligible risks of potential spillovers causing a significant spike in oil prices. This had the potential to pose a substantial economic threat, but fortunately, it did not materialise during the month.
Beyond the geopolitical risks, October data has confirmed a still resilient US economy, while European economy remained on the softer side. The ‘US exceptionalism’ keeps nominal and real yields attractive in several Developed Markets (DM), but also in Emerging Markets (EM) which experienced a significant correction in yields and Foreign Exchange (FX) since the spring. These elevated real yields should continue to slow the economy, and more importantly make monetary policy of most large economies (ex-Japan) more symmetric than before. If inflation does not cool as expected, further adjustments can be made with fewer hikes. On the contrary, central banks will have some leeway to adjust their policy rate lower if the economy slows.
In this environment, we increased our duration to 4.6 years in a diversified way, as we view real and nominal yields attractive. We added some exposures in 3 to 5 years Swiss Franc (CHF) and 9 years Brazilian Real (BRL). We also completed our exposures in US Tips. On the other hand, we booked partial profits in UK 10y as it outperformed during the first half of the month. As corporate spreads widened, we added some credit risk reduced last summer, mostly through US and Europe IG Credit Default Swap (CDS). Lower yields in Europe (Euro, Switzerland & UK) benefitted our exposures, while higher Japanese yields benefitted our Japanese Government Bond (JGB) short. The US Dollar (USD) portfolio detracted some performance on the other hand from both rates and credit spreads. Our traditional portfolio delivered a return of -0.15% (gross of fees*).
With curves steeper, particularly in Europe, our Long-Short curve strategy outperformed. We booked profits on Poland Government asset swap, while our USD asset swap in the short end benefitted from its positive carry. As Italy outperformed France, we book some profits and expect further tightening to unwind the position. Our non-traditional portfolio delivered a return of +0.16% (gross of fees*).
We used the volatility in FX this month to make further adjustments. Looking at the risk-on bias of the FX portfolio, we added some exposures to Chilean Peso (CLP), New Zealand Dollar (NZD), Canadian Dollar (CAD) and BRL. Regarding the risk-off side, we covered our CHF short and sold Euro on bounces. We also booked profit on our South African Rand (ZAR) long. Our currency positions are long BRL (1.7%), Norwegian Krone (1.5%), Mexican Peso (0.9%), Swedish Krona (0.57%), CLP (0.6%) against Singapore Dollar (-0.8%), EUR (-1.9%) and USD (-4%). Our FX portfolio delivered a return of -0.11%% (gross of fees*).
At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.15% net of fees.** The duration stood at 4.6 years and the average credit quality was A+.***
RAM Asia Bond Total Return
Asia Credit: Wakeup Call
- Bear steepening trend in US Treasury yield curve persisted in the month of October.
- China's 3Q23 GDP grew by 4.9% YoY, ahead of 4.5% consensus. More policy easing measures from China but not enough to drive market sentiment higher.
- Asia credit delivered a loss of -0.75% according to JP Morgan Asia Credit Index (JACI) mainly driven by adverse rates movement.
US Treasury yields were volatile in the month of October. The 10-year yield touched the 5% level before reversing course after the Fed Chairman stressed the progress on inflation and labour markets to warrant a more cautious move forward on policy rates. The Fed also acknowledged the tight financial conditions but stopped short on whether this was sufficient to replace further hikes. The Fed held the policy rate unchanged at 5.25-5.50% in the Oct/Nov Federal Open Market Committee (FOMC) meeting and consequently, the market was quick to price in possible peak in the Fed's tightening cycle. The 10-year yield closed out the month at 4.93%, +32bps but gapped lower to 4.66% after the FOMC meeting. However, a bear steepening trend persisted with the 2-year/10-year inversion narrowed from -48bps to -16bps respectively.
China posted a better than expected 3Q23 GDP growth of 4.9%, ahead of the 4.5% consensus. This should place China on-track to achieve its 5% GDP growth this year. There were also several easing measures announced last month; (1) The People’s Bank of China (PBOC) ordered major state lenders to extend terms, adjust repayment plans and reduce interest rates of outstanding loans to Local Government Financing Vehicles (LGFVs) and (2) approved an additional Rmb1tn of special treasury funding in 4Q23 to improve onshore liquidity. However, these measures were still insufficient to bolster market sentiments as the China property market remained in the doldrums especially after Country Garden defaulted on October 25th.
The benchmark JACI posted a -0.50% loss in total return compared to -0.95% loss in September.**** The negative return was mostly attributed to a -0.8% loss from the US Treasuries movements. Asia High Yield (HY) lost -0.5% last month which took its YTD performance to a loss of -1.9%. Investment Grade underperformed with a loss of -0.79% but managed to hold a positive return of +0.91% for the YTD.
The pace of the Asian primary market slowed in October with an Asia ex-Japan bond supply of USD8.9BN compared to USD13.08BN in September. Korean issuers dominated the primary market, but we did receive USD500MN of new HY issue from single-B rated Indonesian Oil & Gas producer, Medco Energi. YTD Asia ex-Japan supply rose to USD100.2BN, down -28% YoY.
Outlook and portfolio performance:
- Higher for longer - preference for the belly of the curve.
- Asia credit valuation remains unattractive relative to historical average but sees pockets of opportunities.
- Stays nimble on rates and selective on credits.
Trading activity and market liquidity should start to taper off as we approach the end of the year. Although Asia credit fundamental remains broadly robust, valuation is less attractive compared to historical averages. For instance, Asia IG 5- to 7-year corporate is currently trading at about 5bps over US peers, which is well below the 5-year average of 39bps. Similarly Asia non-China HY corporate’s pick up over US peers is 66bps versus 5-year average of 149bps. However, China non-property HY still trades wide +548bps over US peers, and well above the 5-year average 362bps. As such, we maintain a cautious view on rates and duration while being selective on credits.
We remained defensively positioned in duration. The rallies in rates would give us opportunities to rotate out of longer tenor position into the belly of the curve. In terms of credit basket, we would be looking at front end to belly of Asia IG Corporates, and non-China Financials.
The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) was down -0.52% in October outperforming the JACI of -0.75%. The fund has returned +1.16% YTD vs. JACI at +0.50%. The fund remains well diversified with a net duration of 3.4 years and 1.8% of cash level.
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).
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