- Most fixed income sectors gained on an excess return basis as credit spreads largely tightened, supported by continued economic recovery. The pandemic’s grip eased as new global infection cases declined and select countries lifted lockdown rules.
- U.S. economic data releases were generally positive, marked by supply bottlenecks and rising prices as demand swelled amid the ongoing reopening. The pace of labor market recovery disappointed with nonfarm payrolls falling significantly short of expectations. Inflation concerns tapered consumer sentiment. CPI rose more than anticipated and recorded the largest year-over-year jump since 2008.
- Most major central banks maintained accommodative monetary policies. The BOE reduced the weekly pace of quantitative easing purchases. The Norges Bank and RBNZ alluded to the first anticipated rate hike, in the second half of 2021 and 2022, respectively. All other major central banks kept their policy rates unchanged.
- Global sovereign yields ended mixed. U.S. yields ended lower despite upside growth and inflation surprises. In Europe, the ECB’s taper speculation drove peripheral yields higher although sovereign bonds pared their losses into month-end after ECB President Lagarde reiterated it was too early to discuss slowing PEPP purchases.
- Global credit bonds outperformed duration-equivalent government bonds as credit spreads tightened over the month. Within the securitized sectors, agency mortgage-backed securities underperformed duration-equivalent Treasuries as higher than expected CPI raised the risk that the Fed may have to taper sooner than anticipated. Within emerging markets, local markets debt outperformed external debt. EM currencies appreciation drove positive performance in local markets, while EM rates movement had a muted impact.
Performance and attribution
- The Fund’s total returns were positive over the month. Strategic Sector and Market Neutral positions contributed favorably to performance while Tactical positions detracted modestly. Over the month, global sovereign yields ended mixed, while U.S. yields ended lower following four consecutive months of increases. Most fixed income sectors gained on an excess return basis as credit spreads largely tightened, supported by continued economic recovery.
- Strategic Sector positions were the largest contributors to positive performance, driven primarily by holdings in emerging markets local debt, inflation-linked bonds, and US mortgage-backed securities. These positions benefited from a surge in global demand that led to increasing commodity prices, a weakening U.S. dollar, and surging housing prices.
- Market Neutral positions also contributed favorably given positive performance from the approach’s two currency strategies, Absolute Return Bond & Currency and Opportunistic Currency. Both strategies captured the broad underperformance of the U.S. dollar given the risk-on environment with holding long positions in the euro, pound-sterling, and select emerging markets currencies. Credit relative value strategies also contributed favorably, capturing outperformance of U.S. investment grade credits versus select Asian sovereign credits.
- Tactical positions detracted modestly as positive contributions from bank loans and long U.S. Treasury positions were not enough to offset negative contributions from European peripheral sovereign debt holdings that re-priced on the back of improvements in the global cycle.
Positioning and outlook
- The portfolio manager believes the global cycle should continue to improve at a brisk pace with the combination of robust monetary/fiscal stimulus and unleashed consumer demand leading to rising nominal global growth and higher inflation. However, the portfolio manager continues to believe that the global economy hasn’t fully escaped the cycle of low productivity and below trend real growth. The portfolio manager expects interest rates, credit spreads, and currencies to remain volatile as market participants oscillate between expectations of rising real yields and more positive but low real rates. Moreover, much of the good news of the observable improvement in cyclical data is priced into credit spreads and global interest rates, particularly in the U.S.
- The portfolio manager’s strategy continues to reflect this more positive outlook for the global cycle through holdings in inflation linked bonds, consumer-linked structured credit, and bank loans. The portfolio manager also believes that emerging local debt and short US dollar positions should continue to generate strong returns as markets continue to recognize the more favorable inflation dynamics outside the U.S.
- More broadly, the portfolio manager expects markets to stabilize at these levels of real yields which would support our positioning in sovereigns in countries that are closer to tightening policy. The portfolio manager expects macro uncertainty will continue to drive market volatility going forward, creating significant opportunities for credit, interest rate, and currency market neutral strategies.
Wellington is an unaffiliated subadvisor to the Sun Life Financial OFI Fund. For professional and accredited investor use only. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND AN INVESTMENT CAN LOSE VALUE.
Not intended for reproduction or use with the public. Any views expressed herein are those of the author(s), are based on available information at the timing of writing, and are subject to change without notice. Any forward-looking statements apply only as of the date they are made, and Wellington Management assumes no duty to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. This should not be construed as investment advice or a recommendation to buy or sell any specific security. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness.
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