US and German yields stay low despite good economic figures


Fund Commentary
21 Dec 2017


In November, the US unemployment rate remained low at 4.1% and, more importantly, wages rose. In Europe, the Q3 growth rate reached +0.6% (QoQ), leading to an anticipated annual growth rate of 2.2% in 2017 and 2018. The Federal Reserve confirmed its optimistic view, which would lead to gradual increases in the Fed Funds rates with the next hike scheduled for 13 December. In the Eurozone, despite encouraging economic data, the ECB is still concerned about too low inflation figures.

In this context, the curve has continued to flatten in the US:

  • the 2y US Treasury yield increased from 1.60% to 1.78% (+18bps),
  • the 5y rose from 2.02% to 2.14% (+12bps), the 10y increased from 2.38% to 2.41% (+3bps),
  • and the 30y decreased from 2.88% to 2.83% (-5bps).

In Europe, the German curve flattened as well:

  • the 2y German yield increased from -0.75% to -0.68% (+7bps),
  • the 5y declined from -0.35% to -0.31% (+4bps),
  • while the 10y Bund stayed unchanged at 0.36%.

On the credit side:

  • the European iTraxx Main hardly decreased from 50 to 48bps,
  • while the US corporate CDX index stayed at 52bps.

In Emerging Markets:

  • the CDX 10y EM index widened from 234 to 238bps (+4bps).


During the month, the Investment Adviser decreased the weight of the following holdings: GE 2020 FRN, Shell 2018, Siemens 2018, FCE Bank 2019, Asfinag 2020, Deutsche Telekom 2021 and Telekom Austria 2021. Moreover, the remaining stakes in three bonds have been sold: NederlandseWaterschaps Bank 2019, TVR Fin 2019 and ICO 2021. At the same time, three new names have been purchased: CTE 2024 (French Utility BBB+) in the secondary market and two green bonds in the primary market, Gas Natural 2025 (Spanish Utility BBB) and China Development Bank 2021 (Chinese Government Agency A+) respectively. In the Futures market, the Investment Adviser reduced the short position by buying back 15 Bunds. As a result, the modified duration increased from 1.0 to 1.6. In terms of portfolio diversification, the Fund held 33 issues from 33 issuers.


During the month, the Investment Adviser sold the remaining stakes KfW 2021 and General Electric 2024. The team bought a new bond in the primary market, China Development Bank 2022 (green bond, Chinese Government Agency A+). In addition, the 10 Long Bond futures sold in October have been bought back. As a result, the modified duration increased from 4.9 to 5.7. In terms of portfolio diversification, the Fund held 27 issues from 25 different issuers.


During the month, the Investment Adviser bought the new China Development Bank 2022 (green bond, Chinese Government Agency A+) in the primary market and sold the old issue China Development Bank 2026 (not green). In terms of geographical breakdown, the top 3 countries were Mexico (16.1%), India (12.1%) and China (11.6%). The rating allocation was 63.4% Investment Grade, 33.7% Crossover (BB+ and BB) and 2.9% cash. The breakdown of the portfolio in terms of market allocation was 93.2% Emerging Markets and 4.0% Developed Markets (i.e. Luxembourg/ArcelorMittal). In terms of sector allocation, the Investment Adviser favoured Materials (28.8%) followed by Governments (24.2%) and Energy (20.0%). The modified duration stayed around 5.2-5.5 during the month (5.2 at month end). In terms of portfolio diversification, the Fund held 36 issues from 36 issuers.


The Investment Adviser’s outlook remains tied to two major topics, inflation and Central Banks’ behaviour. In Europe and the US, inflation is historically low and is likely to remain persistently below target. The current economic situation in the US is probably at a turning point, at which equities are becoming less attractive and long Treasuries more interesting.

In Europe, tapering remains the main concern. After the October ECB meeting, the picture is clearer and the ultra-accommodative policy likely to persist. As a result, the team is more comfortable with BBB spreads, as both corporates and peripheral governments could still widen but not to the degree expected. Regarding the Bund curve, the potential steepening seems postponed as the European Central Bank is still very dovish.

In the US, the Investment Adviser still believes that long US Treasuries (10 to 30 years) will become increasingly attractive. The team thinks that they could be a top performing asset class in 2018 and that an inverted slope of the curve is not excluded. Any correction would be seized by the Investment Adviser as an opportunity to add positions for a medium-long term strategy (outright and/or purchase of 30y bonds hedged by a short 5y future position).

The Investment Adviser will continue to closely monitor the resilience of the global cyclical recovery, G3 Central Bank balance sheets, tapering concerns and geopolitical risks in order to seize any opportunity to reinvest in high beta Emerging Markets. The team thinks that the latter still offer the best risk-reward profile and continue to be supported by low defaults, attractive carry and low supply.

In conclusion, the Investment Adviser perceives the best performing asset class in a short-medium term horizon to be high quality Emerging Markets, but from a medium term perspective (2018 and beyond) long dated US Treasuries look appealing.

The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 13/12/17 and are based on internal research and modelling.