Commentaries

Uncertainties around US elections and Covid-19, but limited stress

13 November 2020

Clement Perrette

RAM (Lux) Tactical Funds - Global Bond Total Return fund - Gilles Pradère Senior Fund Manager, Fixed Income

Markets exhibited idiosyncratic moves in October. While US rates went up due to an expected “Blue Sweep”, they decreased in Europe due to expected ECB action as a response to recent soft lockdowns and economic data. Despite significant corrections in US and Europe equities, credit spreads behaved well.

The support provided by Central Banks continue to limit volatility and financial stress. Indeed, US high yield has been able to deliver a positive performance despite US equities underperformance and slightly higher rates.
Part of this move up in US yields can be explained by the expectation of a large Democratic stimulus. Another explanation is that the current US QE program no longer absorbs the new treasury supply. Regarding election risk, it seems unlikely that Democrats will win a 60-seat majority in the senate, and they will then be forced to rely on the budget reconciliation process to pass any major fiscal legislation. The Fed is also very attentive to any significant increase in real yields that might reduce the effectiveness of its policy, and those two factors might limit this move up in yields. With a resurgence of covid-19 cases in Europe, several states entered new lockdowns. Unexpected by most, this creates some uncertainties, but as a large part of the economy remains open, the impact will be less negative compared to March.

With rates moving back to the lows in Europe, and relatively tight spreads, we booked profits on Euro high grade corporate exposure after a robust performance. As in September, we used the equity selloff to scale into AT1 bonds issued by large Eurozone banks with a strong balance sheet as they are needed to allow a good flow of credit. We also continued to scale into US and Eurozone High Yield as we expect the support to remain. With EUR performance compensating the US one, our traditional portfolio delivered +0.02% (gross of fees)

As in September, with stable spreads overall, our activity has been limited in our non traditional portfolio which delivered -0.01% (gross of fees).

We added a long JPY vs EUR as a diversified opportunity. We remain long NOK, SEK, CAD and now JPY against USD and Euro. NOK detracted some performance when stress intensified at the end of the month, but the other currencies outperformed. Our FX portfolio delivered +0.02% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.06% net of fees. The duration stood at 4.6 years and the average credit quality was A.

 

Source: RAM Active Investments.