Commentaries

Disappointment, and capitulation

30 August 2019

Gilles Pradère

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

August has seen strong performance of safe assets, while riskier assets underperformed, particularly emerging debt and equities.

The U.S. Fed disappointed at its July meeting, and as in December last year, a policy perceived as restrictive translated in lower yields and lower equity markets. However, the main driver behind the rise in volatility this month was a sharp increase in trade tensions. Therefore, yields significantly declined in the U.S., but also in Europe where a significant share of the market now enjoys negative yields. Looking at real yields and inflation expectations, investors are capitulating on hopes that rates could normalize soon. Absent better economic figures, the pressure is increasing on central banks to ease, and on governments to deliver fiscal easing.        

With duration in U.S. treasuries and a defensive spread exposure, our traditional portfolio benefitted. The main performance driver was U.S. duration. European periphery did well, while spreads remained relatively stable. We have started to reduce our quality duration in Europe by selling some OAT futures, while we increased slightly the U.S. Treasuries exposure. Due to the strong performance, we booked some profits on Italy, and later took advantage of the moderate widening to add to our periphery exposure. Our traditional portfolio delivered +1.15% (gross of fees).

Our non-traditional positioning, biased by an easier stance by the Fed, suffered this month. The U.S. curve flattened, U.S. Treasuries underperformed swaps, with elevated tensions between U.S. and China. We have added to the curve steepener and kept the Asset Swap. The Spanish curve flattened, and we booked profits on the strategy. Our non-traditional portfolio delivered -0.22% (gross of fees).

Our FX bias is moderately for a softer USD, and an intensified trade war has not helped, but we expect USD strength to be capped as, we believe, it is not in the U.S.’s interests. Our FX portfolio delivered -0.13% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.73% net of fees.  Duration stands at 4.24 years and the average credit quality was A+.

 *Sources : RAM Active Investments