- Date:
Marketing Communication
Executive Summary
Key events in market
The Short Term US Credit bond market delivered a positive performance in March: the Fund’s reference market (ICE BofA 1-3 Years US Corporate excluding 144A Index) delivered +0.40% during the month, the 3-5y bucket +0.38%, while the 10+y bucket -1.42%.
Key performance & positioning updates
In March the Fund delivered a positive absolute return of 0.39%, in line with the reference index. The Fund ends the month with A rating, 4.79% in terms of yield, modified duration at 1.85 years (vs 1.80 years of the reference index).
Market Update
March saw a reversal in market sentiment and the MSCI World All Countries Index fell 4.15% in the month, bringing its year-to-date performance to -1.7%. The losses were steepest in the US - the Nasdaq lost more than 7% in March - while European indices limited the losses and emerging countries posted a small gain.
Treasury yields fell in the US but rose in Europe where the 10-year German Bund approached 3%. The reduced yield spread between US and European government bonds and the prospect of a more expansionary fiscal policy in Europe boosted the euro which rose more than 4% against the US dollar. The US dollar fell against major currencies and its trade-weighted exchange rate gave up all the gains made after the US presidential election in November 2024.
The decline in equity markets reflects concerns about the impact of the tariffs threatened by the US and the likely retaliation by other countries. Fears of a global trade war add to the evidence that the US economy is slowing and there is a real risk that uncertainty about US economic policy will lead to a recession. The expectation of interest rate cuts by the Fed explains the decline in US bond yields.
In contrast, Germany plans to increase public spending on infrastructure and defence. The improved growth outlook prompted an upward revision of expectations on the European Central Bank's (ECB)'s monetary policy. Despite the strengthening of European currencies against the US dollar, the local stock markets have lost much less than the US.
Finally, in China it is worth noting the more constructive approach towards the stock markets by the administration, highlighted by the meeting between Xi Jinping and the heads of the main companies in the technology sector, including Jack Ma. Together with the announcements of further stimulus measures for the economy, this has contributed to the better performance of emerging stock markets compared to those of developed countries.
Fund Performance & Positioning
In March the Fund delivered a positive absolute return of +0.39%, in line with the reference index. In terms of relative performance, the asset allocation within the curve was slightly negative, while the security selection contributed positively.
On duration the Fund maintained a neutral stance (1.85y vs 1.80y of the reference market): we still hold almost 0.72y underweight in the bucket 1-3y which is more than compensated by overweight in the 0-1y (+0.05y) and 3-5y (+0.72y). Looking at factor contribution we have 45% given by 3 years exposure, 13% from 5 years, 24% from 2 years and 11% from 1 year. 7% comes from credit spread.
From a sector point of view, the Fund maintained a higher exposure than the reference market in the financial sector (61% vs 49%). What continues to differentiates us is the broader diversification in terms of countries and issuers given that we’re underweight 18% on US names. We don’t have any subordinated debt or US regional banks and we don’t hold any short-dated USTs (US Treasuries) anymore. This exposure has been used for USTs high liquidity in case of new issues on the primary market, repositioning and good yields provided. Market opportunity will drive us in holding USTs looking ahead.
In terms of countries, we are well diversified outside US. We are totally exposed to thirteen countries belonging to the benchmark (out of 20 countries), and other three which are outside the reference index and supranational (3.3%). Our major exposure outside US (39%) is in Canada (11%) and France (9.5%). Our major underweight is in US (-40%), mainly due to underweighting financials (-18%) and utilities (-5%) and Technology (-4%).
Looking at ratings, we continue to keep an overweight on the higher quality rating buckets AAA/AA (+16% vs benchmark), slightly underweight (-3.7%) on A bucket (40% in the portfolio). We reduced the underweight in the BBB bucket from -14% to -12%, now at 22%. We are invested in 100 positions (vs 1’550 of the reference index).
In terms of trading activities, we continue to join the primary market following some inflows: SUMITR ‘28, CBAAU’28, NWG ’28, LGENSO ’28, UOBSP ’28, and DELL ’28. We focused the trading on the 2-3y bucket selling very short bonds (< 1 year) when needed. All trades have been completed following our specific investment process, is based on risk framework analysis.
The Fund starts the new month with an A average rating (vs A- of the reference index), 4.79% in terms of yield and 1.85 years in terms of duration.
We continue to avoid considering aggressive and volatile positioning such as high yields and/or subordinated bonds: good opportunities are provided by the Investment Grade universe, allowing us tp focus in delivering a cautious approach. In our view, better risk adjusted returns are the clear outcome for clients who invests in this short term investment grade product.
The Fund has all USD denominated issuers, so no Forex exposure. No derivatives have been used. In addition, it is useful to remember the Fund is an Article 8+ with green bonds at 6% vs 1% of the reference index.
Outlook
In its last meeting, the Fed kept the federal funds rate at 4.25-4.50%, in line with market expectations. It announced that it would slow the quantitative tightening pace reducing the maximum cap on treasury runoff to $5bn (from $25bn), while leaving the cap on mortgage backed securities at $35bn. The updated projections show lower growth, higher unemployment and higher inflation than in Dec 2024. The stagflationary mix of sluggish growth and sticky inflation was highlighted by Powell as the main reason why the FOMC is in no hurry to cut soon. Even so, comments by the Fed Chair suggesting that the FOMC would consider any tariff-induced inflation spike as transitory, and that (long-term) inflation expectations are well-anchored. This confirms that the Fed is more concerned on the growth shock from tariffs. The median dot was unchanged and showed 50bp of cuts in 2025, 50bp in 2026 and 25bp in 2027. Long-term fed funds were still at 3%. At the time of writing, the market expects the next rate cut not before June 2025 (66% of probability) and 3 rate cuts by the end of the year. On the market high uncertainty remains ahead of 2 April when the Trump administration is set to announce reciprocal and sectorial tariffs, after announcing 25% tariffs on auto imports. This is having an impact on confidence and would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures. What the EU is willing to offer will depend on the scale of US tariffs, and the US’ willingness to negotiate over the coming weeks and months. So, the story still needs to be watched closely: such policies can reshape global growth dynamics (Canada, Mexico et al). In the meanwhile, no agreement of ceasefire between Russia and Ukraine took place. In the last day of the month Trump even said that he would consider “secondary tariffs” on Russian oil if a ceasefire with Ukraine can’t be reached. Persistent geopolitical uncertainty remains, to be monitored closely.
Looking at our market, credit spreads have tightened further even though the supply has been high. The demand remains elevated as investors are drawn to the high all-in yield, particularly with the expected decline in yields on monetary products. We expect stable credit spreads over the coming months, keeping carry elevated. We will focusing on auto and credit card sectors. Autos because of the tariffs, the transition to electric vehicles and sluggish demand from China. On the other side, the credit card loans defaults have hit the highest level since the wake of the 2008 financial crisis, a sign that lower-income consumers’ financial health is waning after years of high inflation. On the portfolio we continue combining high quality floating and fixed securities to hedge against changes in central bank perceptions. We follow our approach that aims to maximize diversification through a strong and repeatable investment process, focused on risk. Our proprietary risk tool picks up a series of small idiosyncratic risks in the investment universe that we wish to avoid, while ensuring we are better diversified on the primary risk factors. We continue to avoid subordinated bonds, regional banks, low liquidity issuers/bonds and countries such as China. Whilst aware these elements are an important missing factor in our diversification, we prefer to avoid exposure to be consistent with our Investment process.
Our process continuously screens the universe (including primary market) to add diversification/minimise risk. Both quantitative and qualitative expertise challenge each other, to deliver the best risk adjusted returns. By focusing on short-term, high-quality IG universe, the Fund totally embeds risk analysis. Additionally, we believe the Fund provides a way to de-risk asset allocation by providing a strong, repeatable and cautious approach.