December 2018 - Slow and gradual degradation in fixed income - Tactical Fund Manager's Comments

9 January 2019

Cédric Daras, Clement Perrette, David Fung, Gilles Pradère, Olivier Mulin

Convertibles Europe 

Global Bond Total Return 

Asia Bond Total Return


Fixed Income markets in 2018 has produced a challenging year to navigate to say the least. Various risks at a global scale arose but have generally been contained. The overall tone was negative, with a slow and gradual degradation throughout the year. Amongst the major reasons, the Fed’s quantitative tightening caused turbulence in emerging economies highly reliant USD funding, with Argentina and then Turkey being at the epicenter of attention; and triggering at same time a focus from market pundits on vulnerable countries with a similar configuration. Then, the Italian populist government created jolts by diverting from budget discipline and eventually reducing its initially announced deficit, kicking the can down the road. Moreover, trade war tensions and Brexit issues were omnipresent, adding to volatility and negatively impacting sentiment.

From a performance perspective, aside for developed market government bonds (which managed to close the year in positive territory - negative when adjusted to inflation), a global diversified fixed income allocation was down for the year. The credit repricing from rich levels occurred in a relatively steady fashion, with spreads hovering now close to their median levels observed over the last 15 years (see chart below):  

Source: Bloomberg

Volatility is here to stay

Policy and growth uncertainty will likely carry on into the first part of 2019, continuing to feed volatility in fixed income markets. In our view volatility denotes risk and opportunity. We are starting to see in specific areas attractive yields and spreads compared to a couple of months ago. A highly selective approach is required in this environment. In the credit repricing process, we will continue to apply a disciplined investment approach through:

  • Maintaining a robust portfolio: focus on liquid bonds and IG issuers
  • Asymmetry maximization of our portfolios: each position’s upside vs downside is assessed individually, as well as at a strategy and portfolio level
  • Dynamically shifting the positioning: capture what we perceive to be the best risk-adjusted trades

Patience, prudence, and attention to detail will, as always, govern our investment approach and extending our strategy’s long term track record continues to be our primary objective.