Commentaries

Compressed volatility

14 September 2021

Gilles Pradère

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

High quality bonds corrected slightly following a strong job report in the US. Developed equities did well (again), while Emerging ones rebounded after a difficult July. The outperformance of risky assets allowed High Yield bonds to perform, while spreads remained relatively stable and tight overall.   

 

At the end of the month, the Federal Reserve hosted its virtual Jackson Hole Economic Symposium, an event often used by its Chairman to send messages to financial markets. While acknowledging that the pace of asset purchases will likely be reduced around the end of the year, Mr Powell’s speech was relatively dovish, justifying a cautious approach and remaining optimistic that the recent rise in inflation will be transitory.

 

This was another confirmation of developed economies Central Banks stance this year. Combined with the summer low activity and massively abundant liquidity, this has contributed to maintain an environment in which volatility is compressed, allowing financial assets to perform. Fixed Income markets remain caught between a decent but plateauing level of activity on one side, ample liquidity and the spread of the Delta variant on the other side.

 

We have kept a balanced and moderate duration between Euro and USD in our traditional portfolio, with the bulk of the corporate exposure in banks. Our Emerging debt exposure, increased at the end of July, has performed this month. We took advantage of the outperformance of US Treasuries versus swaps to switch our duration hedge in Treasuries. We tactically received 4y USD swaps as rate hikes expectations remain elevated. In Euro, we continued to book profit on the BTP exposure, with yields now close to the lows. Our traditional portfolio delivered +0.10% (gross of fees).

 

The Euro long end steepener between 10y and 30y, quite correlated with the overall market direction, performed as the bund corrected. With the US curve flatter during the month, our 7y vs 30y steepener in the US underperformed. The Austria 100y vs 30y Germany underperformed, without any idiosyncratic reason, reaching the high end of the range. Our non-traditional portfolio delivered -0.04% (gross of fees).

 

We reduced our long CNY by buying back EUR and SEK, increasing our short USD in the process. We remain long SEK, CNY, NOK, JPY, RUB, GBP and CAD against EUR and USD. Thanks to a weaker EUR, the 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 +0.01% net of fees. The duration stood at 3.71 years and the average credit quality was A.

Source: RAM Active Investments