Diverging paths

13 April 2021

Gilles Pradère

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

During March, the recovery story continued to unfold in the US. Equities and High Yield bonds benefitted, while Treasuries and High-Grade bonds underperformed. In the Eurozone, equities also outperformed, but yields declined slightly, favouring both High Grade and High Yield. With a stronger dollar, EM equities and EM hard currency spreads underperformed slightly.

Indeed, financial assets have reacted to each area specific environment, highlighting diverging paths. Having passed the American Rescue plan, the US government works on another large infrastructure plan. Combined with a relatively fast vaccine rollout and muted new contaminations, the US economy is poised to quickly recover from last year contraction. Eurozone, on the other hand, suffered a series of setbacks. A third wave of contaminations, and a slow vaccine rollout, deteriorated 2021 outlook. Moreover, the European fiscal spending, smaller than in the US, is not yet deployed. This situation motivated the ECB to expand its bond buying temporarily to maintain accommodative conditions. This should hopefully weaken the Euro and support the economy, in the absence of a new aggressive fiscal plan. Nevertheless, leading indicators have been robust despite this situation, including in the services sector, and vaccine delivery should improve in the coming weeks, keeping hopes alive, even if the road to complete recovery is likely to be long.

We used the treasury market rebound in the first half of the month to reduce our USD duration, as yields were still below 1.5%. Mid-March, Treasuries cheapened in relative value, giving us the opportunity to move some of our duration hedges on swaps, less volatile in case of stress. In Euro, we bought 6 years BTP in a correction, while using a following rebound to hedge them against OAT. As in previous months, we increased our High Yield exposure, which now stands at 11%, by selling protection in Europe and US. Our USD duration hedges performed, mitigating the High-Grade underperformance, while European periphery and High Yield exposures contributed positively. Our traditional portfolio delivered -0.03% (gross of fees)

This month, as steepening resumed, our long 10-year Germany outperformed the 30-year, contributing positively, as well our Austria 100-year which slightly outperformed Germany 30-year. With an attractive carry, and on hold central banks, we scaled into a long 5-year against 10-year in Canada. Our non-traditional portfolio delivered +0.11% (gross of fees).

We added some CNY, as well as some SEK as it corrected against EUR. We further reduced our USD short by selling EUR, and kept longs in NOK, SEK, RUB, GBP and CAD. Our FX portfolio delivered +0.03% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.02% net of fees. The duration stood at 2.54 years and the average credit quality was A-.