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AXA Global Strategic Bond Fund: US treasury curve steepens

  • 19 April 2021 (5 min read)

Key points

  • Markets are pricing in impressive growth forecasts for major economies in 2021
  • This is impacting on expectations for short-term inflation and future interest rates
  • Yield curves have steepened as a result, with long-dated government bonds hit hardest

What’s happening?

The “reflation trade” continued during March, with government bonds, particularly in the US, hardest hit. In the UK, 10-year gilts hit a yield of 0.88%, levels not seen since before the global pandemic over 12 months ago.

Long-dated bonds underperformed and the US treasury curve steepened as future interest rate rises are priced in, albeit expectations for short-dated interest rates remain stable. The Federal Reserve reiterated the intention to keep official rates on hold for the foreseeable future.

Vaccine rollout continues at speed in the UK and US, with Europe lagging but expected to pick up over coming months. The US pandemic fiscal stimulus also got passed and provided further support to risk markets.

The unwind of a large, leveraged, Asian-focused hedge fund, and the supply chain disruption through the Suez Canal blockage, failed to dent investor confidence.

Portfolio positioning and performance

Defensive (40%): we remain cautious on duration with a low 2-year exposure and a focus on trying to preserve capital. The strategy benefitted from low US duration and a bias towards the steepening of long-dated assets. We increased our exposure to inflation-linked bonds to benefit from higher break-evens, which did well during March.

Intermediate (26%): exposure remained constant around 25%, but we rotated out of financial bonds into non-financial new issuance. We retain a preference for European investment grade, with a bias to lower-rated BBB assets.

Aggressive (34%): small reduction to emerging market debt exposure in favour of developed market high yield. Higher government bond yields, and a pick-up in Asian debt and Turkish volatility, added to the weaker sentiment around emerging market debt.


In the short term, there is positive momentum around risk assets and a growing consensual view that government bond yields will head higher. Expectations for inflation are on the rise, although we believe that this will be relatively transitory, as short-term base effects will be offset by the longer-term deflationary pressures of globalisation, technology and demographics.  

There is also growing evidence of a pick-up in leverage in capital markets, which is starting to show some signs of volatility and small pockets of weakness. While we continue to prefer risk assets over high quality government bonds, we are focused on the fact that government bond valuations have improved, whereas spreads and yields further down the credit curve have got more expensive.

Over the coming months, there could be an opportunity to improve the quality of the portfolio and once again hedge against a potential increase in volatility further down the line.

No assurance can be given that the AXA Global Strategic Bond Fund will be successful. Investors can lose some or all of their capital invested. The AXA Global Strategic Bond Fund is subject to risks including counterparty risk, derivatives risk, geopolitical risk, interest rate risk, securitised assets or CDO assets risk, emerging market risk, liquidity risk, credit risk, risks linked to investments in sovereign debt, high yield bonds risk and contingent convertible bonds (“CoCos”) risk. Further explanation of the risks associated with an investment in this fund can be found in the prospectus.

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