AXA Global Strategic Bond Fund - May 2022

13 July 2022 (5 min read)

No hiding place for global fixed income

Central banks continued to raise interest rates in both the US and UK, pushing yields higher
We are improving the overall credit quality of the portfolio as the growth outlook weakens
Our medium-term outlook for bond returns remains positive, even with more pain ahead

What’s happening?

Inflation data remained elevated, bond yields moved higher and central banks continued to move towards tighter financial conditions.

The Federal Reserve raised interest rates by 50bps to 1%, while the Bank of England increased rates once again by 25bps to 1%. This drove US 10-year yields through 3%, although they found some support mid-month to rally lower. UK 10-year gilts also bounced off 2% levels while German 10-year government bonds went through 1% – the first time markets have seen this since 2014.

Despite the rising inflation and higher yield environment, we saw growth and housing data weakness in the US. Chinese data disappointed as the impact of heavy lockdowns and zero covid policy brought to bear. Finally, we saw disappointing earnings from some major US retailers.

Credit spreads posted a rally towards month-end as government bond yields stabilised but still posted negative total returns during May.

Portfolio positioning and performance

Defensive (34%): we added short-dated US duration during the month as markets speculated that the Fed may move towards a pause in the second half of the year. We continued to hold elevated cash across the portfolio as the outlook looks increasingly uncertain.

Intermediate (33%): unchanged exposure during the month as the high-quality credit portion of the portfolio found some support during May after heavy losses year-to-date. Our concentration in BBB-rated credit had previously been hit by a combination of weakness in both interest rate and credit sensitivity, but our 10% US credit exposure performed strongly during May.

Aggressive (34%): having recently reduced some exposure to high yield cash bonds, we further enhanced this more defensive credit position through a CDS hedge. This will reduce the credit beta of the portfolio should volatility pick up over the summer.

Outlook

Fixed income total returns have suffered their worst ever start to a year since most relevant benchmarks have been established. With elevated inflation, central banks behind the curve and markets showing very little confidence, the period of volatility looks to be with us for the foreseeable future.

We have started to improve the quality of the portfolio in the last few months. Increasingly it looks to us like government bonds and higher quality credit offer better risk-reward, as markets will likely start to focus on a weakening of the global economy. But for the moment, the short-term focus is on trying to find confidence that inflation has peaked and that central banks are in control of the situation.

The medium-term prospects for positive fixed income returns seem realistic, but the short-term outlook is murkier than ever with little confidence that bond yields have found a clearing level. Once that happens, we expect spreads to perform well, but that might not be until later in the year.

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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