Performance

The bond markets continued their rally in the month of July, on the back of signs of ongoing economic recovery, coupled with better-than-expected corporate earnings reports for the second quarter. Our fund showed a gross performance of 2.9% in July, bringing the year-to-date return to 11.3%. The month launched with the US jobs report, which showed an increase of 4.8 million nonfarm payrolls in June, while the unemployment rate decreased to 11.1% from 13.3% in May. However, weekly new unemployment claims keep coming higher than one million. Both manufacturing and non-manufacturing Purchasing Managers Indices worldwide have also come in better-than-expected, but after the V-shape upward movement in May and June, the recovery is loosing some steam. In addition, the number of Covid-19 infections is still on the rise and this will keep a lead on the pace of the recovery. We expect that it will take several years for the global economy to return to pre-crisis level. Therefore, markets remain dependent on continuing support from the US Federal Reserve. At the latest meeting, the US central bank reiterated its commitment to ongoing monetary support. With the inflationary pressures muted, we believe there are no rate hikes in the near future and the US Treasury yields will also remain low for a significant length of time. The Fed’s monetary support continued driving huge inflows into corporate bond markets. This led to credit spreads seeing a dramatical decline since the March high, with the US Investment grade reaching levels close to pre-crisis. We believe there is still credit spread tightening potential on many segments until the end of the year, but the movement will be volatile. Emerging markets’ central banks have also remained accommodative and the return in global demand is being already reflected in a surge in economic activity. However, EM countries have less room for monetary and stimulus support and the recovery of emerging markets lags that of developed markets. We did not significantly alter our geographical allocation, instead we favor a bottom-up approach for credit selection. This month, we acquired new bonds by Russia’s largest petrochemical producer Sibur (BBB-), Brazilian railway operator Rumo (BB-/BB) and US online travel services provider Expedia (BBB-/BBB+). We have participated in other primary offers, but did not receive allocations due to our limits. New bonds were issued with zero to negative concession to primary markets, as they were met with high demand from investors. We also fixed profits on some long duration bonds in leveraged portfolios. Looking forward, we expect the US election, US-China trade tensions and a slow pace of economic recovery to weigh on market sentiment. With many uncertainties ahead, and in expectance of higher volatility in fall, we keep being overweight quality, maintain a moderate duration and aim to gradually reduce the leverage. Our fund closed the month of July with a leverage position of -37.1%, an average duration of 4.8 years and an average yield-to-worse of 3.2%.