AXA Global Strategic Bond Fund- June 2021
US curve flattens after less dovish tone from the Fed
- Government bonds rallied in June, driven by the long end of the US treasury curve
- The Fed’s less dovish tone created a strong market reaction
- We are improving the portfolio’s credit quality as valuations seem very expensive
- Government bond yields moved lower in a bout of volatility which probably caught many investors out, as the reflation narrative and higher government bond yields continues to be a popular theme.
- Volatility was greatest in the long end of the US treasury curve, which flattened very aggressively subsequent to the less dovish tone in the Federal Reserve’s June update.
- Broadly speaking, credit markets have been well behaved, leading to a narrative of “the everything rally” sponsored by central banks’ loose monetary policy. However, there are signs of certain pockets of weakness, in particular with Asian credit and to a lesser extent emerging market debt.
- With stable credit spreads in developed markets, many credits are starting to look fully priced for a very positive outlook which may or may not materialise.
Portfolio positioning and performance
- Defensive (35%): during June the fund benefited from our recent addition to duration, particularly in 30-year US treasuries. We also reduced exposure to inflation linked break-evens, which should cheapen up if the lower nominal yield is reflecting less growth or inflation than many investors expect.
- Intermediate (30%): we have slightly increased our exposure to investment grade at the expense of high yield over the last few months as we look to improve the quality of the portfolio and have more exposure to higher quality rather than lower quality credit.
- Aggressive (36%): in our high yield allocation we reduced exposure to some Asian credits where the market is seeing some volatility, possibly a reflection of excessive risk taking over previous months. In US dollar high yield, we still favour short-dated carry bonds and carry less risk than the market generally.
- The government bond market has rallied significantly and the period of higher yields is increasingly in the rear view mirror. There are two current narratives: one that the rally is being driven by a short squeeze and increased technical demand for bond buying, with the other that the bond market is pricing in a rolling-over of growth and inflation expectations.
- Whichever narrative is most plausible, there is certainly a conflict between what the bond market and credit market are telling us. We are minded to reduce credit risk and improve the quality of the portfolio to reflect very expensive credit valuations after many successful months.
- The summer may provide some opportunities to rotate further down the credit curve but, for the moment, we maintain a more cautious stance.