Commentaries

Dispersion behind Fixed Income Strength

10 May 2021

Ashwin Aiyappan, Nevin Nie

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

Markets update

Interest rate volatility dissipated in April and brought a rally broadly in fixed income. This also led to broad strength in all asset classes. In Asia credit though, the month was much choppier driven by concerns around China Huarong. Beginning April 1st, concerns around a potential restructuring, on a credit perceived to have central government support, led to a very volatile month and created dispersion during the month. Credit spreads yields broadly rallied but there was relative under/outperformance in names and sectors. In addition, the COVID developments in India led to a bout of weakness briefly in Indian credit, that ultimately was shorter lived due to the broader market backdrop. The push-pull factors remain with yields still tenuously placed due to the building signs of inflation, specifically due to commodity prices, potential normalisation/DM growth and supply-side constraints, offset by a return of COVID concerns around the developments (cases and the Indian variant.)
Asia Investment Grade spreads widened by 9 bps this month, while High Yield spread tightened by 11 bps. The spread of Asia High Yield over IG has compressed by 20 bps to close at around 477 bps. At month end, Asia High Yield return sits at +1.74% whilst Investment Grade is below at -1.86%. The benchmark JACIs YTD return was -1.03%.

Outlook and portfolio performance

The value continues to remain in Asia credit both in Investment Grade and High Yield as the macro backdrop in the region is strong but with the acknowledgement COVID developments in EM Asia need to be monitored closely. We are remain cautious due to the potential inflation challenges and conversely, COVID developments.
The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was up 0.31% in the month of April. The fund remains well diversified. We remain invested with a net duration of 3.7 years and 6.6% cash level, and we would look to rotate out of cash and tightly traded Investment Grade bonds into new issues or strong BB credits with rating upside and at some time add duration.

 

Source: Nexus Investment Advisors Limited.