Performance

The month of June started on a full risk-on mood which continued until June 11, when increased concerns regarding a second wave of coronavirus infections prevailed. The worries were further amplified by the Fed’s gloomy economic projection announced after its regular meeting that has reminded that economic recovery could be long and painful causing panic on the markets. At the same time, the US central bank has promised to keep making whatever-it-takes to revive the economy and keep markets functioning. Mid-June market correction has once again demonstrated how fragile markets still are. And it has also proved once again that the Fed’s words are very powerful. On June 15, the Fed has stepped in and announced it will start buying individual corporate bonds under its Secondary Market Corporate Credit facility. This sent fixed income markets rallying and supported them through the end of June. Our fund showed a monthly result of 3.6%, bringing YTD performance as high as 8.1%. Incoming economic data also added to the supporting factors. Both manufacturing and non-manufacturing activity pointed to a sharp V-shaped recovery in May and June. We expect the recovery curve to flatten thereafter. Unemployment is still high at 11.1% and monetary as well as fiscal support will be needed for a long time. The increase in the number of new infections worldwide has kept a lid on general optimism and left markets with the dilemma of weighing the hope of economic recovery with the fear of a new outbreak. We believe this situation will continue in the following months. This, together with approaching US elections will maintain markets’ volatility at a high level. The benchmark 10-year US Treasury yield started and finished the month at the same level of 0.66%, even though it has fluctuated throughout the month reflecting the change in market sentiment. We believe the Fed will intervene as needed to keep yields low. However, some steepening of US Treasuries yield curve may be expected due to increased offer in long-dated government debt to finance fiscal programs. While not as high as in the previous months, primary market activity was still relatively elevated. Both investment-grade and high-yield issuers tapped markets for cheap borrowing. We received allocations in some good names, like, Indian chemical company UPL (BBB-) and Russian petrochemical company SIBUR (BBB-). At the same time, we fixed profits on some long duration and low yielding issues. In the current situation, we prefer primary market to the secondary one due to new issue premium, so we will continue selecting primary offers to participate in. We are not ready to take more risk, so we keep the duration at the current level and the weight of North America and IG issuers high. Our fund closed the month of June with an average yield-to-worse of 3.7% and an average duration of 5 years. We decreased the leverage to 37.9% from 48.5% last month due to some profit-taking.