Monthly commentary discusses recent developments across both the Diversified Bond and Credit Income Opportunities Funds.
Macro & Credit
November saw a continuation of the trade related volatility, with several headlines and official comments sending very different signals. While the macroeconomic data has failed to find a direction one way or another (Figure 1), sentiment has turned very bullish in equities and credit on the expectation that a trade deal with China is all but certain (investor surveys point to about 75% odds of a deal).
Credit spreads are back at cycle lows and U.S. equity price-to-earnings multiples are flirting with their pre-tax reform highs. However, below the surface, earnings growth expectations for 2020 are weak (0% to be precise) and several lower quality credits are trading at distressed levels. Indeed, the excess spread required by investors in the riskiest category of high yield bonds (Rated CCC or lower) is back to levels not seen since 2016 (Figure 2).
Therefore, with the tariff deadline of December 15th approaching fast, inconclusive macro data and valuations high everywhere bar the riskiest corner of the credit markets, we maintain our overall cautious stance and prefer to wait for more information.
Diversified Bond Fund (DBF)
The fund returned 11bps in the month, driven by strong credit performance and our U.S. treasury positions. Detracting from performance was our European sovereign bonds (France and Germany), where yields were modestly higher on the back of better than feared data. There were no major changes in the portfolio in November.
Credit Income Opportunities Fund (Credit Opps)
The Credit Opps was up 26bps in November, driven by continued strength in credit and a modest contribution from duration (U.S. 10-year treasuries). There were no major changes in the fund in November, we are comfortable with the current fund positioning and prefer to wait for better opportunities to emerge before making meaningful portfolio construction changes.
We’d like to take this opportunity to thank our investors for their continued support and wish you and your family Happy Holidays and a prosperous 2020.
Until next year,
The Bond Team: Mark, Etienne and Chris