Performance

Markets remain caught between optimism about the economic recovery in the US and the worries about potentially unsustainable rise in inflation. Overall, the better-than-expected first quarter earnings reports and an abundance of liquidity on the market has sustained a strong demand for corporate bonds, which contributed to our fund showing a positive gross performance of 0.8% for the month of May. However, inflation narrative stays in the forefront of market’s attention. Worries of a strong uptick in inflation are driven by a significant surge in commodity prices, as well as supply shortages and logistical bottlenecks as reported by companies. This has already resulted in price increase: the US PCE core deflator rose 3.1% YoY in April, beating the 2.9% forecast by analysts. However, it is reasonable to believe that the aforementioned effects which exercise upward inflationary pressures will be transitory. Fed maintains a steady position, reiterating that it will look past temporary inflation and it does not expect any interest rate increases at least until 2023. But a continuing improvement in the labor market situation will likely force Fed to start discussing tapering at some point this year. While the actual tapering will probably occur later than the year end, the forward-looking market may still rush in to price it in way ahead of the happening. This may cause some further increase in volatility and in the long-term yields of US Treasuries by the end of the year. Covid-19 pandemic has led to rising social tensions across many Latin American countries, and that may considerably complicate their political configuration. With the elections approaching in Chile, Peru, Colombia and Brazil, these countries face increasing political risks. Thus, we expect increased volatility of their bonds near-term. At the same time, this may provide an entry point to some corporate names we like if they reach our desired prices. Primary market issuance has been strong during May. We have had an opportunity to participate in several new bond issues and lock in new issue premiums as well. We have subscribed in new bond issues of the Australian Newcastle Coal Infrastructure Group (BBB/BBB-), the supranational African Export-Import Bank (A-/BBB-/Baa1), Turkish LimakPort (B3/BB-) and we have also acquired amortized bonds of the Chilean utility company Empresa Electrica Cochrane (BBB-/Ba1) on the secondary market. Besides, we have fixed profits on some of high-yield bonds which have seen significant credit tightening in previous months, namely, bonds of the Republic of South Africa maturing 2029 (BB-/Ba2/BB-) and bonds of the Sultanate of Oman maturing 2028 (BB-/Ba3), among others. Overall, we maintain our conservative stance of low duration and a tilt to investment-grade rather than high-yield in our portfolios. Our fund has closed the month of May with 5.0% in cash, average duration of 4.7 years and average yield-to-worse of 2.4%.