Democrats victory, sawtooth moves

8 February 2021

Gilles Pradère

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

After a strong start, risks assets ended the month with a negative performance, except for Emerging Equities. Safe assets underperformed, and with already tight credit spreads, most corporate and emerging markets bonds also underperformed.

The Georgia election delivered two unexpected victories for democrats, offering them a razor-thin Senate majority, and raising hopes of a supplementary fiscal package. At USD 1.9 trillion, the announced size is large. Even if this amount is likely to be negotiated in the coming weeks, it increases growth expectations, pushing US 10-year yields above 1%. This has some implication for the US Dollar, particularly against some developed currencies with low yields. Indeed, the US economy, potentially even more supported in 2021 by this new fiscal boost, has resisted better than others in 2020.

Both the US Federal Reserve and the ECB confirmed that they remain supportive, and now is not the time to discuss the exit. High contamination level remains a constraint on economic activity, and the vaccine rollout will take time. Overall the environment remains growth supportive, but it is also largely priced by most financial assets, explaining their sawtooth moves.

Consequently, we remain tactical, having raised our cash levels over the last few months. We booked profits on some High-Grade exposures, as well as on various rate markets where yields remain low as in SEK and CAD 5-year area. We bought some new issues in USD EM and moderately increased our EUR AT1 exposure, while keeping our High Yield exposure. We remain tactical on duration, having increased it to 4.8 years in the first half of the month, and used the following rates decline to reduce it to 4.3 years. With rates up, and spread stable, our traditional portfolio delivered -0.25% (gross of fees).

The Euro curve has steepened slightly allowing our long Germany 10-year to outperform the 30-year. Our long Austria 100-year against Germany 30-year was unchanged. Our non-traditional portfolio delivered +0.04% (gross of fees).

We continued to book profits on USD shorts against some developed currencies at the beginning of the month. We sold EUR, reduced long in SEK and NOK, while keeping longs in CAD, RUB, GBP and JPY against USD. Our FX portfolio was flat (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.29% net of fees. The duration stood at 4.3 years and the average credit quality was AA.

Source: RAM Active Investments.