Credit markets get a boost from rates

11 April 2019

Ani Deshmukh

RAM Active Investments RAM (Lux) Tactical Funds II - Asia Bond Total Return

Market Commentary

The month of March was characterized by a further capitulation in rates, led by dovish Central Banks. The ECB March downgraded their growth forecasts in 2019, leading Bunds lower from their February-end levels. The Fed also presented a markedly dovish outlook for onshore rates in the U.S., pointing to persistently slower levels of inflation as well as modestly lowering their growth forecasts. Pertinently, the pace of the Fed balance sheet runoff has also changed, with new guidance for an end to the balance-sheet led QT by September 2019. These shifts in Central Bank’s outlooks caused a significant decline in interest rates, with the 10-year UST yield dropping to a low of 2.37% on March 27th and the curve inverting, before recovering to 2.49% currently. The Dollar however resisted expectations of a decline. This in our view can be attributed to the weaker global growth outlook, which impacted EM, and the ongoing Eurozone and Brexit concerns, which impacted the Euro. Economic indicators globally continued to remain soft, with initial export data declining sharply YTD. PMI numbers remained weak as, adding to the sense of malaise in growth expectations for the remainder of 2019. 

 EM Asia and China exports trends

EM Asia and China exports trends

Portfolio Commentary

We believe the current market backdrop is dichotomous, with lower rates and Central Bank support providing technical support to credit markets, while slowing growth and regional political concerns remain an overhang on fundamentals. Corporate balance sheets and earnings are likely to see the impact of slowing growth in 1HFY19, and credit coverage metrics could potentially weaken as a result. However, policy measures, especially by China, are hoped to provide an accommodative backdrop which should help growth bottom out in 2HFY19. From a credit perspective, lower rates are beneficial as we expect new issue markets to remain open as issuers look to refinance debt and lock in additional financing. However, growth and cashflow pressures are likely to manifest themselves mid-year, and valuations as a result, are unlikely to keep richening in Asian credit.

In terms of positioning, we have moved the portfolio duration higher over the course of Q1 given the change in rates view. Our Fund’s duration is 3.9yrs compared to 2.6 years in end-2018. We expect long-term U.S. rates to remain range-bound given the decisive shift in data as well as the Fed’s outlook, and therefore would look to run a longer duration portfolio compared to 2018. We continue to remain wary of chasing excessive prices moves in bonds, especially in High Yield.

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

*Sources : Nexus Investment Advisors Limited