Commentaries

Interest-ing Rates

12 March 2021

Ashwin Aiyappan, Nevin Nie

RAM Active Investments RAM (Lux) Tactical Funds II - Asia Bond Total Return

Markets update

February began, with a strong risk rally in equities and interest rates also reflected the optimistic mood as yields pushed back to the January highs. The risk asset rally was followed by a weak end to the month, similar to January, pointing again to the challenges in the near-term. Stimulus headlines drove the reflation trade but the sharp move in longer end US yields, post the mid-month UST auction, had a cascading effect on risk assets and USDEM FX. Again, this was a reminder of the push-pull that fixed income will perhaps face in 2021. With many central banks meeting in March, their comments and actions with regards to interest rates volatility and the levels yields have reached will be the key signal to the course of investment action in fixed income in the short-term. The month, like January, reinforced in a small period more potential catalysts to be buoyant about and challenges we need to navigate. As we move into March, the markets challenge to central banks on rates may show us where yields are capped in the short-term. The balance between growth, inflation and interest rates, is finely poised but there will be a point at which some actions may be forthcoming; this could be different for each country.
Within Asia credit, the market gyrations were also noticeable with interest rate moves. The outperformer was HY, where shorter duration combined with yield and a positive regional economic outlook, led to an outperformance. There was a strong rally in the “list”, with Chinese IG names reversing the prior months’ weakness but mainly due to rates, the IG component of the JACI was the underperformer.

Asia IG spreads tightened by 8 bps, while HY spreads tightened by 15 bps. The spread of Asia HY over IG has decompressed by 7 bps to close at around 478 bps. USD +23 BN was issued during the month. At month’s end, Asia HY return sat at 0.46% whilst Investment Grade displayed -1.17%.

Outlook and portfolio performance

Our thesis remains the same but with one eye firmly fixed on interest rate and inflation trends. The value continues to remain in Asia credit both in IG and HY as the macro backdrop in the region is strong. Risk sentiment remained balanced, even with the large macro and rates volatility in February. COVID-19 developments are worth still being vigilant about but the vaccination rollout is a strong positive catalyst going forward.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) was up 0.11% in February, with the UST hedge being a critical performer and the P&L broadly distributed at bond level. The fund remains well diversified and invested with a net duration of 4.21 years. The cash level stood at 3.81%, and we think developments next month in interest rates and central bank responses as the key signposts to watch. 

Source: Nexus Investment Advisors Limited.