Fixed Income Monthly Comments - March 2024

Global Bond Total Return

Still on track

Having repriced a more reasonable path for potential policy rate cuts in February, medium term yield declined during March, especially in economic areas where growth is weaker such as Europe, while the move was more muted in the US. As was the case since the beginning of the year, risk assets benefitted from the low volatility environment, with credit spreads continuing to grind tighter.

March was eventful as ECB, BOJ, US Fed, BOE and SNB held their meetings almost in the same week, which provided an opportunity to adjust their messages. Data released during the month confirmed the resilience of the US economy, while Europe in general remained soft, even if leading indicators point to some improvement. Inflation remained on a downtrend, but has also been stickier than expected.

In that context, central banks delivered a message of confidence that inflation is still on track to move towards their 2% target, especially as policy rates are now significantly above current inflation levels, but they made clear that the road can be bumpy. By doing so, they look to avoid excessive tightening or loosening of financial conditions, and achieve both positive growth and lower inflation, something they have achieved so far.

With a resilient economy, rates remain relatively range bound for now and we used the rally during the first half of the month to sell some low yielding exposures in USD, GBP and EUR, as a tactical move. We improved the carry of the portfolio by selling some rich EM sovereign like Saudi Arabia, and replace them by more attractive EM Sovereigns spreads such as Poland. As volatility remains muted, we have kept the corporate exposure relatively unchanged as the potential disinflationary rate cuts and robust average corporate fundamentals remain supportive. Our traditional portfolio benefitted from both rates and spread this month, and delivered a return of 0.99% (gross of fees).*

With central banks keeping the door open to disinflationary cuts, the long end of the curve reacted with a moderate steepening in EUR and USD. After recent repricing, the environment should ultimately be positive for the strategy as long end curves (10y vs 30y) remain at quite an attractive entry point, while they historically steepen ahead of rate cuts. US treasuries slightly outperformed swaps, and we keep the position still modest as supply continues to weigh. Our non-traditional portfolio delivered a return of +0.09% (gross of fees).*

Shorts in CHF and EUR, and long in MXN outperformed, while our long NOK and SEK underperformed. Our currency positions are long NOK (1.90%), BRL (1.78%), TRY (0.97%), MXN (0.90%), IDR (0.75%),  SEK (0.65%), AUD (0.40%), HUF (0.27%), against PLN (-0.28%), CHF(-0.53%), SGD (-0.8%), EUR (-2.7%) and USD (-4.2%). Our FX portfolio delivered a return of  -0.01% (gross of fees).     

In March, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +1.06% net of fees.** The duration stood at 3.96 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: Not So Soon

• The market pushes bet on first cut to June after the US Federal Reserve held rates in March

• Slower supply coupled strong demand support tighter spreads

Asia credit spreads have tightened for five consecutive months, mirroring the movement of US credit spreads. This tightening can be attributed to a combination of factors, including reduced Asia credit supply, strong demand and decreased volatility in US rates. According to the J.P. Morgan Asia Credit Index (JACI), Asia credit spreads tightened by 9bps month-over-month, reaching 182bps last month.**** In comparison, the J.P. Morgan US Liquid Index tightened by 10bps. Additionally, there was a bear flattening in the US Treasury market last month. The 2-year Treasury yield increased by 9bps to 4.62%, which further deepened the 2-year to 10-year inversion by 3bps to -40bps. The 10-year Treasury yield concluded the month at 4.22%, marking a 2bps increase compared to the previous month.

In March, notable policy events unfolded. The US Federal Reserve maintained its policy rates unchanged but retained a dovish stance. The Bank of Japan (BoJ) abandoned its negative interest rate policy and yield curve control, setting new guidelines for its overnight call rate. China's Two Sessions meeting revealed the continuation of existing policies, with an ambitious 5% GDP growth target for 2024. Despite disappointment in the lack of details and stimulus for the weak property market, the government's plan to issue ultra-long central government special bond issues was seen as a positive step to address local government funding concerns.

In a busy March, the Asian primary credit market saw a significant increase in dollar issuance. USD 9.8 billion was issued, up +19.5% from the previous month and nearly doubling from a year ago. Demand was diverse and strong, with books reaching 11 times the issuance amount. Notably, a single-B rated Indian non-bank financial company raised USD 350 million in the high yield market. Bank Negara Indonesia also returned with a USD 500 million issuance of senior bank capital.

Looking at the first quarter of 2024, the total issuance in Asia (excluding Japan and Australia) amounted to USD 38.6 billion, falling just 7% short of the previous year's level.

Outlook and Portfolio Performance

• We expect the robust primary market to continue into the summer

• Staying nimble across the portfolio to pick relative value

We have maintained a portfolio duration of 3.9 years, indicating our intention to manage interest rate risk at a moderate level. Additionally, we have actively participated in the primary market to capitalise on opportunities. We have also made a strategic decision to increase the portfolio's exposure to non-investment grade securities by 3 percentage points, bringing it to 22% to enhance the overall yield of the portfolio.

The fundamentals and technical of Asia credit are currently showing strength, indicating a favourable environment for investors. Asia's central banks are expected to proceed with rate cuts, albeit likely in the second half of the year, as there is an anticipation of a similar move by the US Federal Reserve around the middle of this year.

Given the prevailing technical tailwind, we anticipate that Asia credit spreads will continue to remain tight compared to historical averages. This also warrants us to remain cautious and flexible in our investment strategy. We continue to focus on identifying assets that offer an absolute yield pick-up and staying nimble in our investment approach.

In March, the RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD net of fees *****) returned a positive total return of 0.78% and trailed the JACI; +1.06%. The fund maintains a well-diversified portfolio with a net duration of 3.9 years versus the index duration of 4.4 years. Additionally, the fund held a cash level of 0.2% 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.

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 Funds are 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).
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