Central Bank tweaks

10 June 2021

Gilles Pradère

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

In May, US rates continued to consolidate following their Q1 increase, while Eurozone rates pushed higher for most of the month as the vaccine rollout gained traction and the economy reopens. These diverging moves contributed to a soft dollar, allowing Europe and Emerging equities to outperform the US ones.

This month, Eurozone and US Central Banks tweaked their message, but in opposite direction. Following a contraction in the first quarter, the European economy is only in the early stages of the recovery, while recent talks of “tapering” the PEPP in June generated some widening of Sovereign spreads within Eurozone. Ahead of the ECB June meeting, some key members have become more vocal about the need to maintain the Pandemic Program at its recently increased level to continue to favor financing conditions and reduce fears of some disorderly moves.
On the opposite, Federal Reserve Vice Chairman, after being very clear about the need to maintain the maximum support up until recently, has started to convey the message that they will start to talk about adapting this support to an improving economy “in upcoming meetings”.
Clearly, central banks communication remains very cautious, as they still want financial conditions to remain supportive. Any change towards less support is meant to be perceived as a minor tweak, and any significant tightening is perceived as unwelcome, which generates a low volatility environment. Only a much faster improvement of the economy, or a self-sustained development of inflationary forces could change the picture, but the temporary nature of the reopening boost offers them some time to see where the dust really settles.

In this context, we remain tactical and position the portfolio in order to benefit from this low volatility by maintaining our carry exposures, particularly in High Yield, keeping a steepening bias and a moderate duration. We took advantage of the decrease in US yields to sell some rich High-Grade exposures. We also switched some tight agencies and bought US treasuries instead, which have cheapened and are more liquid. In Europe, we took advantage of the moderate rate increase to add some exposure in some bank bond new issues, while switching from Greece to Italy on our peripheral exposure. Our traditional portfolio delivered +0.32% (gross of fees)

Our Eurozone 10-year overweight against 30-year performed slightly, while our CAD and USD steepener have been unchanged. All these strategies benefit from a very positive carry and roll down. We have entered a long 7-year US Treasuries against swaps as US Treasuries cheapened. Our non-traditional portfolio delivered +0.02% (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 +0.04% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.28% net of fees. The duration stood at 3.2 years and the average credit quality was A.

Source: RAM Active Investments