Carmignac Portfolio Global Bond

The widening gap between monetary policies on each side of the Atlantic, intensification of geopolitical risk (escalation of reprisals in the Middle East) and doggedness of inflation (in part due to commodity prices) led to a bond market correction in April. Government bond yields shot up, especially in the United States where the 2yr hit 5%. This has mainly come about because the US economy is outperforming and, in particular, US employment data for March was very strong (303,000 job starts). Although GDP growth slowed in the first quarter (annualised rate of 1.6% q/q), it seems that employment, inflation and to some extent personal consumer expenditure (+2.7% y/y) had a greater influence on market developments.

Investors lowered their rate-cutting expectations as the FOMC meeting approached. Some even fear an increase in the Fed Funds rate if growth stays close to 3%.

Economic growth is much less robust in the Eurozone, although it has stabilised and in some areas, especially services, is even starting to pick up.

Despite the Chinese government’s limited attempts to stimulate its economy and the need for consolidation, the latest figures support the idea of a global economy recovery.

On foreign exchange markets the US dollar appreciated, mainly because the US economy is outperforming and investors have lowered their expectation of Fed Fund rate cuts. The yen was the big loser, closing at a level unseen since 1990 despite Japanese authorities’ attempts to shore up the national currency.

We are remaining cautious and had reduced modified duration to 3.4 by month-end. However, we managed our modified duration flexibly over the month, going down to around 2 in the middle of April. Yield movements seem to be influenced by inflation figures and the resilient labour market. In summary, we remain optimistic for US real yields given how high they are. We are also long on the local debt of emerging markets where real yields are high and a rate-cutting cycle is underway, such as Brazil and Mexico; and we are feeling positive about undervalued currencies that are benefitting from solid economic trends, such as demand for commodities, and out-of-synch cycles. We are also taking a selective approach to special government bond cases (external debt) in the high yield segment, where risk is well rewarded.
We are keeping a certain amount of credit hedging, having increased it to around 14.5% early in the month before reducing it as spreads widened. At a foreign exchange level, our dollar exposure remained long at around 39%. We increased our US dollar exposure to nearly 50% during the month to take advantage of its appreciation. Another 6% is held in the Japanese yen. We have a positive outlook for some emerging markets and commodity-based currencies, including the Brazilian real, and certain Asian currencies such as the won, as the South Korean economy should benefit from the AI boom.