Fixed Income Monthly Comments - July 2023

RAM Global Bond Total Return
Fine tuning
As the soft landing scenario was even more priced in July, risk assets benefitted most, particularly equities. Corporate spreads grinded tighter, supported by a low volatility environment. On the other hand, rates markets evolved according mostly to economic surprises, pushing rates slightly higher in the US, while UK Gilts benefitted from lower inflation than expected. 
During the last weeks of July, central banks from main developed economies used their meeting to fine tune their stance. With the inflation picture generally improving, Fed, ECB and BOE send a message that the peak is -likely- near. Nevertheless, with inflation still above targets and a surprisingly robust economy, they remain prudent of not sending dovish signals either. 
A less expected move was done by the Bank of Japan. They also fined tune their stance, but after being very accommodative, they acknowledged stronger inflation and solid growth. Consequently, they moved the yield cap on 10yr JGB to 1% instead of 0.5%, but with threats of unscheduled intervention to control the rise in yields, a subtle tweak to their Yield Curve Control, so far successful with limited moves and a slightly weaker JPY/USD. 
In order to benefit from an expected summer low volatility, we switched at the beginning of the month our short protection on Euro Main CDS into Euro Xover, but beta adjusted to keep the Credit exposure stable, with a higher carry. As spreads moved tighter at the end of the month, we booked profits on remaining short protection on US IG CDS. The portfolio benefitted from the general tightening and moderate duration centered around the belly. Overall, our portfolio maintains a high-grade bias, with a 9.5% exposure to high yield. Our traditional portfolio delivered +0.69% (gross of fees).
With central banks this month flagging a potential peak soon, curves generally steepened, which benefitted our long end steepeners in US and Europe. As last month, US treasuries slightly outperformed swaps, particularly at the short end. Our non-traditional portfolio delivered +0.27% (gross of fees).
Following the July soft US CPI, the USD weakened quickly during July, and we used the move to book profits and reduce some longs in Euro and SEK. We are still long BRL(0.9%), SEK(0.57%), EUR(0.53%), AUD(0.31%), NOK(0.20%), MXN(0.13%) against USD. Our FX portfolio delivered +0.12% (gross of fees).
At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.96% net of fees. The duration stood at 3.35 years and the average credit quality was AA-

RAM Asia Bond Total Return
Asia Credit: Tug of War
Overview:
The month of July saw US Treasury yields drawn into a tug of war, earlier in the month between healthy US labour market data and readings showing softening inflation, then later in the month between a dovish FOMC and a hawkish Bank of Japan. US economic data now suggested increased probability of a soft landing of the US economy, which means rates could stay higher for longer. Although FOMC as a result has turned dovish in terms of indicating possible rate hike pause, the marked was surprised by Bank of Japan’s decision to adjust the Yield Curve Control (YCC) cap from 50bp to 100bp. All of such has driven the US Treasuries curve bear to steepen in July and experienced a volatile back and forth run that totalled 60bps, in contrast to the bear flattening one-way yield spike in the previous month. 
Month-on-month UST long end yields ended up higher (+20bps in 10-yr UST), while front end and belly yields back mostly unchanged (-2bps in 2-yr UST, and +2bps in 5-yr) after intra-month wild runs. For Asia Credit, with index duration at ~4.4, the US rates belly move are fully offset by small credit spread tightening (-4bps, measured by JP Morgan Asia Credit Index - JACI) especially in Investment Grade (-8bps).  High Yield (HY) turned out to be a drag with spreads widened +69bps, but given small and decreasing weighting of HY to the index, that has not brought too much impact. As a result, the JP Morgan Asia Credit Index scored a positive total return for the month. 
The negative move in HY was led by the real estate sector (+232bps), which in turn was driven by headlines in China property space. Continuously weakened property sales and lack of policy support has brought back volatility to the sector and spill over to other China HY sectors. 

Outlook and portfolio performance: 
On spread levels, the relative value is still not compelling in Asia credit, but improved a bit compared to June. JACI IG-rated corporates’ credit spread difference over US equivalents currently stood at 57bps, 9bps below last-twelve-months (LTM) average, improved 7bps versus end of June. On HY side, the spread difference over US peers is also not cheap, still around 100~150bps lower than LTM average level. Our cautious view to not chase the strong rally in June for China HYs, which were driven by optimistic expectations of strong stimulus policy, turned out to be realistic and hence helped outperform JACI index slightly this month.  
We have been lagging to a small extend to JACI index YTD largely due to underweight in HY, of which the performance has been driven by Frontier Sovereigns such as Sri Lanka and Pakistan, and China HYs. Additionally, the portfolio has a shorter duration than the JACI index, which also contributes to the small underperformance because US rates front end underperformed long end so far this year with the UST curve inverted. Last but not least, in response to US rates move, IG credit spread in long end tightened more than front end as front end credit spreads are capped by high front end risk-free rate levels. Now that after the China HY selloff in July, and US rates curve bear steepened, the fund performance is catching back up a bit with the index. 

In terms of rates, we still hold the view that rates may stay higher for longer. While we remain defensively positioned in duration, we see value emerging in the belly and to some extent the 10 year part of the UST curve after recent significant bear steepening in July. In terms of credit basket, we would still be looking at Asia Financials, whose spread difference over US peers is 6bps wider than 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, while the macro backdrop of Japan continues to improve with Japanese corporates reporting positive earnings surprises this month. In addition, Bank of Japan’s YCC adjustment is likely to push up the bank earnings in the coming quarters. 

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was up +0.35% in July, outperforming the JACI by 0.08%. The fund has returned +2.65% YTD vs. JACI at +3.19%. The fund remains well diversified. We remain very flexibly invested with a net duration of 3.2 years and 3.9% cash levels, and we would look to rotate out of cash and short-dated Investment Grade bonds into new IG opportunities such as Japan, with slightly longer duration, especially if UST yield curve continue to steepen.

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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). 
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