The Fund delivered a positive return in both absolute and relative terms over May.
This was mainly thanks to our credit component, which benefitted from carry as well as narrower spreads, while hedging aimed at reducing exposure to the riskiest corner of the market weighed on performance.
Our curve steepening strategies added to performance.
The portfolio’s selection of collateralised loan obligations and exposure to money market instruments continues to have a positive impact.
Global economies’ resilience, with Europe enjoying a soft landing as real income picks up and inflation gradually returns towards target, should enable the ECB to start its rate-cutting cycle.
The portfolio is therefore keeping its modified duration stable at a modest 2.5, mainly through inflation-linked instruments, curve steepening strategies and a significant credit allocation.
The latter is mostly invested in short-term investment grade corporate bonds and CLOs, providing attractive carry. We are also holding on to our hedges (iTraxx Xover) as the markets are trading at tight levels at a time of ongoing geopolitical uncertainty.
18.2% of the assets are invested in money market instruments, which are a good source of carry with limited risk.
Europe | 76.2 % |
North America | 14.2 % |
Eastern Europe | 8.4 % |
Asia-Pacific | 1.0 % |
Latin America | 0.3 % |
Total % of bonds | 100.0 % |
Market environment
May brought the first signs of normalisation for the US economy and labour market, as well as a surprising drop in retail sales.
Although inflation was slightly lower, Federal Reserve members remained cautious over the month.
The trend was the opposite in the Eurozone. GDP had already firmed up in the first quarter, and more signs of recovery emerged with the composite PMI accelerating.
The improvement was also visible in inflation figures, which rose again in May (+2.6% vs. +2.4%).
This desynchronisation led to a sharp drop in US yields, with the 10yr down 18 bps over the month but the Eurozone trend more upward.
Investors regained their appetite for corporate bonds, as reflected in spreads on the Itraxx Xover index narrowing by 22 bps over the month.