Fixed Income Monthly Comments - June 2024

Global Bond Total Return

Politics taking center stage amid Sovereigns indebtedness

In June, equities exhibited mixed performances. Domestic issues negatively impacted some markets, like Europe, while the overall tone remained positive for the US and EM. Credit spreads, still at relatively tight levels, slightly widened, but without a significant increase in volatility, the move has been muted, while DM Government bonds benefitted in this environment.

June also saw politics taking center stage. Elections in India, South Africa and Mexico at the beginning of the month influenced their respective markets, often due to concerns about Sovereign debt. In South Africa, the African National Congress’s (ANC) low vote result, in a country grappling with low nominal growth and high debt, yielded an unexpected coalition with the pro-business Democratic Alliance (DA), providing some stability despite concerns about its longevity. In Mexico, Morena’s large victory has opened the possibility of less market friendly policies, and potentially higher deficits, which have been avoided so far. However, the previous president, Andrés Manuel López Obrador (AMLO), despite being sometimes disruptive, remained pragmatic and not entirely disconnected from financial markets, as is expected from the newly elected president Mrs. Sheinbaum.

At the end of the month, the issue of poor fiscal trajectory was also central in France snap elections, although not in French voters’ mind. Regardless of the results, reforms are likely to stall, leaving the second European economy, already warned by the launch of the ‘EU excessive deficit procedure,’ under the scrutiny of financial markets. In the US, the campaign started on June 27^th with the Trump-Biden debate, showing little incentive to address the large sovereign debt and deficits.

In the post-COVID-19 economy, corporate and household balance sheets are not excessively leveraged overall, but the governments in most DM and EM countries are. As growth remains robust, the topic is not yet at the forefront, but that could change in other configurations.

With a potentially disruptive France snap election result, and little reaction initially, we sold some French agencies that have performed in line with swaps and replaced them by German Bunds. We slightly increased our duration to 4.5 years by adding UK Gilts and also by closing a short 2y Swaps in CHF before the unexpected rate cuts by the Swiss National Bank (SNB). We reduced the credit exposure by closing the EUR Xover short we had as the spread did not move initially, lowering the HY exposure to 8%. Our traditional portfolio delivered a return of +0.55% during the month (gross of fees).*

We increased our short OAT vs Bunds already in place for poor fiscal trajectories, as the spread did not move initially, and booked some profits when the spread moved to 80bps. We also bought protection on EUR Main and later sold some US IG to initiate a long US IG vs Short EUR IG, as a cost-effective strategy against potential spillovers from the French elections. Our Curve steepeners (10yr vs 30yr) remain in place in both EUR and USD. Our non-traditional portfolio delivered a return of +0.28% (gross of fees).*

We used the CHFUSD bounce to reenter a short closed in previous month. We used the abrupt move post-election on MXN to buyback some of the hedges we had and slightly increase our exposure. Overall, EUR and CHF had a positive contribution, while NOK, BRL and MXN underperformed. Our currency positions are long NOK, BRL, TRY, SEK, MXN, IDR against USD, EUR, SGD and CHF. Our FX portfolio delivered a return of -0.09% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund’s (Class B USD) duration stood at 4.50 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. Past performance is not a reliable indicator of future returns.

*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: Start tuning in to the US Presidential election

• Traders bet on Sep first rate cut

In June, US Treasury yields ended the month with about 10-13 basis points (bps) richer before the first presidential debate on June 27th caused the market to re-assess the implications of a potential Trump re-election in November. After the June month-end, Treasury yields gave back 4-5 bps. The 10-year Treasury yield hit a month low of 4.2% before retracing to 4.43% at the time of this writing. Despite the recent softer US economic data, US rates could be pressured higher on to growing concerns of the widening fiscal deficits.

In Asia, central banks in the region also held their respective rates unchanged last month. The ability to ease is challenged by currency stability and domestic inflationary concerns. In India, the market took comfort in policy continuity after Prime Minister Modi's BJP and its coalition parties held a majority in parliament. India's 10-year government bond yield initially spiked +9bps post-election but has since settled to 7.0%, almost unchanged month-over-month. India's stock market resumed its upward trajectory and is now +8.1% in June and +10.6% year-to-date. In Japan, the Bank of Japan held policy rates unchanged, which put pressure on the yen and pushed it over the 160 level - a threshold not breached since the mid-1980s.

In China, the upcoming Third Plenum is broadly expected to deliver the already well-flagged reform plans. The Plenum should again emphasise plans to limit downside risks from the property downturn and local government debt deleveraging, while at the same time promoting long-term growth potential from new economies. In short, no major surprises are expected to come from the Third Plenum.

Asia issuers took the opportunity to raise offshore dollar bonds last month on the back of rates rally. In June, the total new issuance reached USD 14.0 billion, up +12.9% month-over-month. That took the year-to-date primary issuance to USD 69 billion, up +16.0% year-over-year. Year-to-date net supply remained negative at USD 38.6 billion compared to a net negative supply of USD 32.1 billion in the same period a year ago.

The J.P. Morgan Asia Credit Index (JACI) recorded a total return of 1.2% last month, which was largely attributed to the US rates movement. The blended spreads in Asia credit widened by 6 basis points during the period and ended the month at 170 basis points. JACI returned 2.8% year-to-date.

Outlook and Portfolio Performance

•     Staying nimble for relative value opportunities

Asia credit spreads remained tight compared to the historical average, but all-in yields are still attractive. In line with our expectations, spreads continue to be underpinned by positive technical largely from the net negative supply.

We are more sanguine on Asia credit fundamentals. Primary market activities should remain active in the third quarter before the pace eases into the fourth quarter. Asia's default outlook remains benign.  Overall, our strategy remains intact which is to stay nimble in managing the portfolio duration and yield.

Last month, the RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund’s (Class PI USD net of fees****) duration was reduced 3.5 years from 3.7 years. The portfolio returned 1.0% compared to 1.2% by the index****. This was mainly attributed to the portfolio's underweight in duration and China relative to the index. The portfolio held a 2.5% cash holding at the end of the month.

For a complete overview of the fund performance, please click on the above-mentioned links in this document. Past performance is not a reliable indicator of future returns.

*** 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.

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 Managemetnt 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. This Sub-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.