Mirabaud - Global High Yield Bonds A dist. USD

Performance update

May saw positive total returns in credit but negative returns in US Treasuries as credit spreads continued their recovery on positive trade war progress. Rates markets became increasingly concerned with government fiscal deficits. There was progress on tariffs, with the US first announcing a deal with the UK and then a 90-day reduction on tariffs for China. These developments, combined with solid economic data, reduced expectations for an imminent global recession. Global high yield spreads rallied to retrace 73% of the moves since the end of February. In contrast, the US 30yr Treasury moved +26bps wider, trading above 5%. The curve steepened after Moody's downgraded its rating on the US to AA1 and Trump's tax bill was passed by the Senate, causing markets to focus on the US fiscal deficit and adding a risk premium to US Treasuries.

Positive fund performance was driven by security selection within developed market high yield, where we had returns of +2.1% compared to the market +1.7%. Our overweight allocation to subordinated financials also had a large positive impact, offsetting underweights in emerging markets and senior financials. On the downside, the remainder of the credit derivatives we had added to protect the portfolio from volatility and further downside risk generated a negative contribution. On a sector basis, security selection in financials and energy generated positive relative performance.

Portfolio activity

During May, we further reduced our credit hedges to reflect trade war progress and the reduced chance of a global slowdown – although we remain cautious, as the damage from uncertainty and tariffs is likely to feed into the wider economy eventually. We rotated out of cyclical names that had fully retraced the tariff scare, such as Ashton Woods and Constellium, and added those still trading at recession levels, such as Chemours. We reduced our energy holdings where bond prices did not reflect the move lower in the oil price, and increased our holdings in subordinated financials.