Commentaries

Mammoth US fiscal plan

12 March 2021

Gilles Pradère

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

February saw rates moving up quite sharply across the globe, particularly in the US, Canada and Australia which are generally more cyclical economies. Consequently, Government bonds underperformed. The tightening of High Grade spreads was insufficient to compensate for the rates move, while High Yield market, concentrated in intermediate maturities, has been able to deliver a small positive performance thanks to some tightening. Equities rebounded strongly from January lows, but confronted with sharp rates moves, they remained volatile.

We noted in our January comments that the US economy held much better than most others during the second half of 2020, including on some sectors such as corporate spending, but also looking at broad PMI Services. February’s surprise has been that US authorities, including Mrs Yellen, are doing their best to have their Mammoth USD 1.9 trillion fiscal plan voted. Most specialists, and probably the consensus, were expecting a smaller package, below USD 1 trillion. Such a boost, in a context of an already resilient economy, is a game changer, as the output gap might be closed much faster than expected, in the US at least, and justified a reappraisal of long-term but also medium-term rates expectations. Ultimately, the economy will likely benefit, but with rates moving higher in nominal and real terms, admittedly from still low levels, higher volatility can be expected on risky assets as valuations are quite stretched, creating opportunities.

Consistent with this new scenario, our main move around the middle of the month was to continue to reduce our duration risk to 2.9 years. We sold 5-year US futures initially as it held well thanks to the Fed aggressive buying, and consensus expectations of Fed on hold for very long, turning the exposure later more on the 10-year as the curve flattened in the month-end sharp selloff. We also continued to sell High Grade exposures that still held well in various currencies, such as USD, EUR, CHF, as they no longer fit our new US fiscal boost scenario. By doing so, our liquidity increased, and we only slightly added our High Yield exposure as valuations are still tight. Our traditional portfolio delivered -0.85% (gross of fees).

After steepening for most of the month, the Euro curve flattened abruptly. Our long Austria 100-year against Germany 30-year was slightly wider. Our non-traditional portfolio delivered -0.01% (gross of fees).

Since January, our reduced USD shorts has been concentrated on cyclical currencies such as CAD, RUB and GBP, which held well. We took advantage of a cheaper NOK to increase our long position vs EUR. Our FX portfolio delivered +0.01% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.93% net of fees. The duration stood at 2.9 years and the average credit quality was AA.