Risk appetite returns to buoy fixed income markets
Increased investor risk appetite and easing volatility have helped the performance of high yield and other risk assets buoy the BNY Mellon Global Dynamic Bond Fund as its team seeks to maintain balance in the portfolio.
The BNY Mellon Global Dynamic Bond Fund delivered a positive absolute return in both the second quarter and month of June as government bond yields remained range-bound and credit spreads compressed sharply.
In the most recent performance terms, the fund (US$ W share class) returned 1.0% over the month to 30 June 2020. This compares to a return of 0.02% from its LIBOR US$ 1 month +2% per annum benchmark. Over the year to date (ending 30 June), the Fund returned 1.01% versus the 0.44% return of its benchmark.¹
According to the team, unprecedented policy stimulus and governments’ gradual easing of draconian restrictions on economic and social activity across the globe have all helped steady wider fixed income market nerves following the Covid-19 coronavirus induced market turmoil seen in March, even if some investor doubts persist.
“The tug of war between an economic rebound, assisted by hefty fiscal and monetary support, versus localised coronavirus-related partial lockdowns and longer-term scarring is likely to continue. Maintaining balance in the portfolio is therefore important. Issuance volumes over the summer are likely to be lower, which should encourage credit spreads to tighten gradually,” it said.
As risk appetite has increased, so high-yield credit has proved the standout positive contributor to Fund performance, with CoCo (contingent-convertible) holdings rallying. Investment-grade credit and emerging-market sovereign bonds also produced some positive returns, albeit from materially different percentage exposures, with long-dated holdings among the best investment-grade performers. Meanwhile, emerging market returns were boosted by the strong performance of new issues (including Qatar and Abu Dhabi), while some local currency bonds also performed strongly (e.g. Mexico).
Elsewhere, government bonds generated a modest positive performance for the Fund, with New Zealand local government holdings among the best performers, supported by the Reserve Bank of New Zealand’s quantitative-easing programme. US TIPS (Treasury Inflation-Protected Securities) also boosted returns as break-evens bounced from their March lows.
On the currency front, active net FX positions also contributed positively to performance mainly owing to long pro-risk exposure, including the Mexican peso, Norwegian krone and the Canadian dollar versus short US dollar and sterling positions.
The main change to the Fund strategy over the quarter has been a continuation of the team’s gradual reduction in safe-haven government duration – to take account of interest-rate sensitivity – and an increase in exposure to emerging-market and high-yield debt. Government duration has fallen while emerging-market positions have increased from 10% to 12% and high-yield exposure from 13% to 16%.
The team retains a bias towards conventional government bonds such as US Treasuries and has recently focused more on issuer selection in emerging markets and high-yield than beta, as it believes some companies and countries will find the economic environment challenging over the next few months.
During the quarter, the team continued to increase exposure to investment-grade bonds, which peaked at around 24% before falling to 22% amid profit taking. It also reduced government-bond exposure, especially at the longer end of the yield curve, while in high yield, it selectively added exposure via new issues which appeared to be attractively valued.
Emerging-market sovereign duration was increased, with stable investment-grade-rated sovereign new issues added at elevated spreads. Examples include Qatar, Abu Dhabi and Mexico. Profits were taken in Morocco and Hungary. The team also selectively added to sub-investment-grade hard-currency emerging-market bonds, including Uzbekistan, at attractive spreads.
Currency strategy rotated towards risk, with the net US-dollar positioning moving to -5%, while adding exposure to the Indonesian rupiah, Malaysian ringgit, Czech koruna, the euro, Peruvian sol, Norwegian krone and Canadian dollar.
Commenting on the immediate currency outlook the team added: “We continue to expect the US dollar to underperform as global growth recovers and US political risk rises, and so are short the ‘greenback’ in favour of a range of pro-cyclical and commodity price-correlated currencies.”
Benchmark: The Fund will measure its performance against 1 month USD LIBOR + 2% per annum (the “Cash Benchmark“). The Cash Benchmark is used as a target against which to measure its performance over 5 years before fees. USD LIBOR is the average interbank interest rate at which a large number of banks on the London money market are prepared to lend one another unsecured funds denominated in US Dollars. The Fund is actively managed, which means the Investment Manager has discretion over the selection of investments, subject to the investment objective and policies disclosed in the Prospectus.
¹Source. Lipper Lipper IM as at 30 June 2020. Fund performance for the USD W share class calculated as total return, based on net asset value, including charges but excluding initial charge, income reinvested gross of tax, expressed in share class currency. The charge, which may be up to 5% can be material on the performance of your investment.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
Past performance is not a guide to future performance.