The Fund delivered a positive return in both absolute and relative terms over May.
Conditions for our buy-and-hold strategies remained favourable. Our inflation-linked instruments and curve steepening strategies also made useful contributions.
The Fund’s modified duration increased when we reduced our short position on Japanese bonds and raised our exposure to US short-term debt.
We also built up our exposure to US inflation-linked instruments as the geopolitical situation remains uncertain and consumer spending is holding up well.
Global economies should hold firm over the coming months as stimulus remains high at a time of military and trade conflict.
This should underpin growth, suggesting that we should keep gross exposure to credit strategies high.
However, inflation’s return towards target levels could be a source of disappointment, and the market’s optimism justifies the continued use of inflation-linked instruments within the portfolio.
We are still convinced about the ability of short-term bonds to outperform given that real yields remain high and growth is robust.
Europe | 66.3 % |
North America | 11.3 % |
Latin America | 8.4 % |
Eastern Europe | 6.8 % |
Middle East | 3.1 % |
Africa | 2.4 % |
Asia | 1.5 % |
Asia-Pacific | 0.3 % |
Total % of bonds | 100.0 % |
Market environment
May brought the first signs of normalisation for the US economy and labour market, as well as a surprising drop in retail sales.
Although inflation was slightly lower, Federal Reserve members remained cautious over the month.
The trend was the opposite in the Eurozone. GDP had already firmed up in the first quarter, and more signs of recovery emerged with the composite PMI accelerating.
The improvement was also visible in inflation figures, which rose again in May (+2.6% vs. +2.4%).
This desynchronisation led to a sharp drop in US yields, with the 10yr down 18 bps over the month but the Eurozone trend more upward.
Investors regained their appetite for corporate bonds, as reflected in spreads on the Itraxx Xover index narrowing by 22 bps over the month.