Commentaries

Hawkish tilt, dovish response

12 July 2021

Gilles Pradère

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

In June, yields on benchmark rates declined, while credit spreads continued to tighten allowing bonds to deliver a positive contribution, particularly US corporates. Equities also benefitted, particularly in the US and Europe in a context of a stronger dollar in the second half of the month.

Both the ECB and the Fed held their meeting this month. The ECB confirmed its stance for the next quarter by maintaining its significantly higher purchases under the pandemic emergency program. The Fed has slowly started to engage in discussing tapering, but the real hawkish tilt came from the dots which show the first-rate hike in 2023 instead of 2024. With a policy moving slowly towards less accommodation, the first reaction saw curves flattened, and nervous trading on risky assets. While the flattening has lasted, risk assets rebounded quickly, supported by some Fed members comments, including Mr Powell.

They downplayed the dot plots, highlighting that now is not the time to speak of rate hikes, but asset purchases reduction instead. Slightly confusing, the message seems to indicate that even if accommodation remains large, the journey towards some reduction has started, while rates remained at zero for a potentially shorter but still extended period. With economies reopening, inflation pressures remain elevated, but job creation disappoints somewhat. This very particular economic reality in a ZIRP and large QE environment might explain the low and declining real yields. This is especially striking when looking at 5y forward horizon, while they historically tend to move in the opposite direction in comparable circumstances.

We have increased our duration in Euro by buying back some OAT shorts, as yields remained at the high end of the range. We also added on our 7 to 10y US treasuries long as well as in Canada. As High Yield spreads were historically tight, we tactically booked some profit and lowered the exposure to 8.5%. With the bulk of our traditional portfolio in the 5 to 10y area, where carry and roll down is very attractive, and thanks to a good performance of the Euro portfolio, our traditional portfolio delivered +0.25% (gross of fees).

Despite the flattening in US rates, the Euro curve only flattened marginally this month, and rates in the long-end have also become more attractive, hence we booked profit on our Eurozone steepener between 10y and 30y we held since last year. Our moderate steepening in the US and Canada underperformed as the curve flattened, but we keep them as the carry and roll-down is very attractive. Our long 100y Austria underperformed slightly 30y Germany, and as we reached attractive levels, we increased it. Our non-traditional portfolio delivered -0.12% (gross of fees).

We took advantage of the USD strength to increase slightly our long CNY. We are still long CNY, JPY, NOK, SEK, RUB, GBP and CAD against 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 +0.07% net of fees. The duration stood at 3.72 years and the average credit quality was A.

Source: RAM Active Investments