Performance

The Fund added 1.1% in March having capitalised on overall positive environment which led to further credit spread compression. Both Fed and ECB surprised market participants by softening their stance on future monetary policy which resulted in 30 bp parallel shift down for US Treasuries curve in March while 10 year Germany sovereign bond yield went into negative territory for the first time since 2016. The Fed kept interest rates unchanged at the meeting as of March, 20 and slightly downgraded its estimates for GDP growth in 2019 from 2.3% to 2.1%, while indicating it did not rule out zero rate hikes this year. The ECB at its meeting which took place March, 7 announced a new round of targeted longer term refinancing operations (T-LTRO), aimed to provide eurozone banks with cheap financing. Mario Draghi has also emphasized during the conference that interest rates would remain at extra low levels for a longer period. The ECB has lowered its projections for GDP growth for 2019 from 1.7% to 1.1% and inflation from 1.6% to 1.2%. Oil prices continued the upward trend, supported by Saudi Arabia’s pledge to keep oil production “well below” 10 million bpd and cut its crude oil exports to below 7 million bpd in March. Strong oil supported healthy demand for EM bonds, which was enough to cover surged primary issuance and drive up prices in the secondary market. Turkey bond market disappointed investors in March, as the bonds prices fell by an average of 3%-5%. A sharp decline in Turkey’s FX reserves for the first half of March increased the pressure on the Turkish lira, which already did not feel very confident just before the local government elections, which were scheduled for March 31. We believe that the drop in central bank’s FX reserves is primarily due to high oil prices, which is the majority of Turkish import, and the elections were not so important and did not seriously change the balance of power. We hold short-term Turkish bonds, the volatility of which is not very high, and have not taken any action with them during this time. We decided to fix profits on a number of bonds from Brazil and Mexico, which showed serious price gain since December’18. Brazilian president Jair Bolsonaro faces serious difficulties in the course of delivering on his election program. The pension reform bill is still not approved, while Paulo Guedes, the presidential economic adviser, cancelled his meeting with members of the parliamentary commission to discuss this reform due to heavy critics. We believe that the current situation may drag on for a long time, and investors will lose faith in the new president and his team. We also sold some long bonds and closed the leverage as a result. The average duration decreased from 5 years to 4.5, while the average yield to maturity was 4.7% as of end of the month.