Performance

Bonds markets have had a rather calm month, supported by optimism regarding economic recovery, while inflation fears have somewhat receded. Our fund had a positive performance (B1) of 0.8% for the month of June, bringing the year-to-date performance (B1) value to 0.5%. Optimism about economic growth in the US has been supported by strong data in both service and manufacturing sectors. We expect the US economy to continue growing at a higher pace in the third quarter, but growth will likely peak and slow down thereafter. As about inflationary pressures, US CPI has come in higher than expected, 0.6% in May from April, and 5% year-over-year. In terms of the year-over-year figure, base effects are in play, considering the slump that occurred in May last year. Other than that, the biggest part of the increase is temporary in nature, caused by airline ticket and hotel prices or automobile and truck prices due to semiconductor shortages, among other things. The question regarding how wages will evolve still stands, and the picture here is less clear. As enhanced unemployment benefits are phased out, this may help bring people back to work. On the other hand, a “skills mismatch” may slower the labor market recovery. The absolute number of weekly jobless claims is still at a high of 3.39 million, and there is still a lot of room for improvement. The major event of the month from the point of view of financial markets was the Fed’s regular meeting on 15-16 June. It brought a hawkish surprise, as the dot plot revealed two rate hikes in 2023, - a significant shift from last meeting’s forecast of just one hike in 2024. Hawkish as it is, Fed’s message gave markets the assurance that Fed has an “appropriate policy” and does not play the ignorance card any longer. As for now, it continues buying assets (UST and mortgage bonds) at a pace of US$120 billion per month, which continues to support bond markets. We expect Fed to make an announcement regarding a slowdown in purchases later this year. Nevertheless, we believe it will be done in a more calculated and gradual way, to avoid major market disruptions as was the case with the 2013 “taper tantrum”. In June, we received allocations in new bonds issued by Brazilian steelmaker CSN Resources (BB-/Ba3), global meat processor JBS (BB+/Ba1), Georgian Railways (BB-/B+), Moroccan manufacturer and distributor of chemical products OCP (BB+/BB+), Turkish beverage producer Anadolu Efes (BBB-) and the Eastern And Southern African Trade And Development Bank (Baa3/BB+). We have also purchased on the secondary market some emerging market bonds which showed a temporary selling pressure due to idiosyncratic or country events. We expect the remaining summer period to show decreased trading activity as is usually the case and we remain fully invested. However, we maintain our caution stance to overweight investment-grade and moderate duration as we expect increased volatility in both credit spreads and long-term treasury yields by the end of the year. Our fund has closed the month of June with 0.0% in cash, average duration of 4.9 years and average yield-to-worse of 2.6%.