Diverging paths

10 May 2021

Gilles Pradère

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

After a difficult first quarter, US rates finally stabilized in April. US equities benefited, as well as Europe and EM markets since the USD corrected its recent up move. With credit spreads slightly tighter, corporate bonds performed. On the opposite, European rates underperformed, mainly due to, with a combination of large supply and increasing hopes of a faster reopening.

As in March, central bankers continued to convey a message of patience while economic numbers confirmed the strong rebound expected since the beginning of the year. Consequently, they are walking a fine line, following a patient path towards the eventual exit. Indeed, they do their best to keep monetary conditions favourable, and expect first to see evidence in hard data before acting, as the Fed chairman mentioned. In this context, the strength of the labour market recovery will be important to sustain the economy beyond the current bounce related to the large pent-up demand created by the pandemic. In any case, the road towards rate hikes will be long, but also likely volatile, as the consensus, now quite optimistic, can be shaken by disappointments.

With a view that we are some quarters away from tightening, we invested a portion of our cash into 3 to 4 years maturity bonds in USD, mostly in agencies that offer a good carry and roll-down. We also covered some of our short in Treasuries, keeping our duration hedges mostly in swaps. As the curve prices a significant tightening in CAD, we deployed our cash in 4 to 6 years bonds issued by provinces. With spreads remaining tight, we closed an exposure on US High Grade through an ETF. Given slightly lower USD rates and a low duration in Europe, the portfolio mainly benefitted from its carry component, particularly the BBB and High Yield exposures. Our traditional portfolio delivered +0.20% (gross of fees)

Our long-short strategies are biased to benefit from attractive carry and roll-down. Our overweight 10y against 30y in Europe posted a slightly positive performance, as well as our CAD curve steepener. We also added a 7y vs 30y in USD as this segment of the curve is offering both an attractive entry point and a very positive carry. Our non-traditional portfolio delivered +0.03% (gross of fees).

We kept our exposure in CNY, NOK, SEK, RUB, GBP and CAD, against short in EUR and USD. 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 +0.16% net of fees. The duration stood at 3.5 years and the average credit quality was A.

Source: RAM Active Investments