Fixed Income Monthly Comments - September 2024

Global Bond Total Return

Supporting growth

Most financial assets had a strong performance during September. Rates went down, especially the intermediates and shorter maturities of developed markets. Risk assets benefitted from coming lower policy rates, while growth remain still decent, particularly in the US.

Indeed, the moves reflect expectations that central banks are likely to succeed in delivering a soft landing for the global economy. Despite inflation levels still above the 2% target in general, dynamics in the data point to a steady improvement, and a high probability that this target is in reach. With that in mind, central banks are now focusing on supporting growth, and this month the Fed delivered a larger than expected a 50bp cut in its policy rate.

This type of environment is generally supportive for risk assets, especially equities, and a steepening of the yield curve. To some extent, it is already priced in, with forward rates expected to decline significantly, credit spreads tight, and equities near or at the highs. In that respect, coming growth data, especially the US job data, will be important to keep this scenario in place. There are also other sources of volatility at the agenda, with the still undecided US presidential election and the rising geopolitical tensions in the Middle East, but their impact on global growth is not yet obvious.

With still significant rate cuts expected, we reduced slightly the USD  duration by paying swaps, and we also booked profits on some of our CHF exposures as yields continue to move lower. As UK yields largely underperformed both Europe and US, we increased our UK Gilt exposure. Our credit exposure has been maintained overall in our traditional portfolio, with high-yield (HY) exposure kept at 8%. Our duration is mainly in Europe (Euro, GBP, and CHF), and less in USD. Our traditional portfolio benefitted from the rates decline and tighter spreads, delivering a return of +1.01% (gross of fees).*

Curves continued their steepening trend, particularly in Europe, where the Central bank is at risk of being behind the curve, as inflation declines quickly while growth is anemic. With UK Yields underperforming, we entered a long Gilt vs Short Bund spread close to the 200 bps levels, which is historically wide. As US Treasuries continue to cheapen vs Swaps, we bought 5 and 10y UST against swaps, close to 2015 cheapest levels. Even large issuance plays against the trade, the carry and roll-down remain compelling and the absolute level already incorporates the information. Our non-traditional portfolio delivered a return of +0.27% (gross of fees)*.

The month was characterised by a broad USD weakness, which was beneficial. We closed our long CLP and reduced also the IDR long. Our currency positions are long NOK, BRL, MXN, SEK, against USD, EUR, and SGD. Our FX portfolio delivered a return of +0.19% (gross of fees).*

At the end of the month, RAM (Lux) Tactical Funds – Global Bond Total Return Fund’s (Class B USD)  delivered +1.37% net of fees. The duration stood at 4.31 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: Flip the Script

•       Latest policy measures by China policymakers send China risk assets on a tear

On September 24th, the People's Bank of China (PBOC), the National Financial Regulatory Administration (NFRA), and the China Securities Regulatory Commission (CSRC) introduced a significant stimulus package aimed at the monetary policy, property, and equity markets, which could inject RMB 2 trillion into the financial system. This announcement positively impacted Chinese risk assets. The CSI 300 index has risen by 20.3% since the announcement, while Hong Kong's HSI index increased by 18.6%. In the dollar Asia credit market, J.P. Morgan’s China and Hong Kong indices returned approximately 1.1% each last month, following a 30-50bps tightening in China IG corporate bond spreads, primarily driven by financials, asset management companies, and select Chinese property developers.

What has changed this time? First, the approach of Chinese policymakers appears to be different. The scale of the policy measures suggests a more decisive strategy rather than a piecemeal approach. Second, the recent communications from China indicate a willingness to increase fiscal spending to meet growth targets and address the decline in the property sector. These factors suggest a renewed urgency, implying that additional measures may be forthcoming before the year ends.

In the U.S., the Federal Reserve did not disappoint with its policy rate decision during the September FOMC meeting. However, the 50bps cut, coupled with Chairman Powell's dovishly hawkish comments, left the market uncertain about the trajectory of future cuts. The Fed Futures market continues to project an additional 100-125bps in cuts before the end of the year, with a 65% chance of at least a 25bps cut in November. Consequently, the 2-year U.S. Treasury yield fell by 28bps to 3.64%, while the 10-year Treasury yield dropped by 12bps to 3.78%. As a result, the 2-year/10-year spread turned positive, reaching +22bps, marking a sustained period of positivity since July 2022.

We had a busy month in the Asia primary market, with USD 16.8 billion in new issues added to the Asia ex-Japan U.S. dollar credit market, a significant increase compared to the USD 8.3 billion in the previous month. As a result, total new issuance year-to-date has risen to USD 104.2 billion, reflecting a year-over-year increase of 30%.

The J.P. Morgan Asia Credit Index (JACI) posted a total return of 1.21% last month. During this period, blended spreads in Asian credit narrowed by another 8 basis points to 152 basis points. Year-to-date, JACI has returned 7.15%.

Outlook and Portfolio Performance

•       Kicking off Q4 on a strong note

The Asia credit market entered the final stretch of the year on a strong note. China and Hong Kong credits returned a combined 7.61% year-to-date, while Non-China credits also delivered an impressive 6.75%. We expect U.S. rates to remain relatively range-bound for the rest of the year, but we are mindful of key macro events that could impact the landscape. Notably, escalating geopolitical risks in the Middle East that could also play a pivotal role in the upcoming U.S. Presidential election in November. Fundamentals and technical factors in the Asia credit market remain favourable, with a key event to watch being further policy easing in China following the September 24 easing policy blitz.

The portfolio strategy remains focused on bottom-up credit selection to enhance yield and returns. We anticipate that the Asia primary market will pick up before Thanksgiving, and we plan to opportunistically participate in the new issue market. Currently, the portfolio maintains an underweight position in the long end of the curve relative to the index, which we consider appropriate given the steepening bias of the U.S. Treasury curve.

Last month, the RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund’s (Class PI USD net of fees****) yield was 5.5%, compared to the index's 5.4%. The portfolio duration edged up to 4.1 years, while JACI's duration stands at 4.5 years. The portfolio returned 1.23% in September, with a year-to-date total return of 6.04%. At the end of the month, the portfolio held 3.2% 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. Global Bond Total Return Fund is classified as art.8 SFDR. Asia Bond Total Return 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.

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, 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.