Interest rates
Since April, interest rates have shown volatility as they progress upward, resulting in a decline in sovereign debt valuations.
The main central banks have continued their course of raising interest rates. In the last four months, the Federal Reserve has increased rates by 50 bps to a range of 5.25-5.5%, levels already considered restrictive. The ECB, meanwhile, has raised rates a further 75 bps, situating the refinancing rate at 4.25%.
In light of these hikes, the market believes additional increases are unlikely, given several factors: i) the latest macroeconomic data indicate easing pressure on the US labour market; ii) in recent months, inflation rates have progressively decreased; and iii) activity data show some weakening, especially in Europe and China.
Sovereign interest rates have emulated the upward trend of the central banks. Increases are especially notable in the US, where interest-rate decreases have been ruled out until Q2 2024 at the earliest. In addition, the US economy is demonstrating greater resilience than Europe, where some countries show signs of slowing. Thus, the valuation of US Treasuries has corrected nearly -3% since April (0.64% YTD), while German bonds have dipped -0.38% in the same period (1.18% YTD)
Corporate bonds
Corporate credit, for its part, has performed well. Spreads have narrowed for both high-yield and investment-grade qualities in the US and Europe.
High-yield spreads, especially in the US, have narrowed most. This superior performance relative to the sovereign, coupled with some elevated coupons, has yielded very good results for corporate credit vis-á-vis sovereign bonds.
European HY credit has gained 2.67% in the last four months (6.41% YTD), while IG credit is up 0.94% (3.23% YTD).
In short, among bonds, HY has been the top performer in recent months and in YTD terms, while on the opposite end of the spectrum the sovereign has had the poorest performance.
EDM Ahorro
EDM Ahorro increases the defensive positions in its portfolio. The fund has boosted the weight of sovereign bonds to 33%.
The corporate credit cycle is fairly advanced and valuations are increasingly demanding. Indebted companies are steadily growing more vulnerable to a potential weakening of economic activity and an environment of high rates. Therefore, we continue to position EDM Ahorro more defensively in terms of credit, reducing the weight of segments such as HY and bonds in small- and mid-cap companies (from 20% at the April close to 11% at present).
We also continue to increase exposure to both investment-grade corporate bonds and sovereign debt, segments that tend to perform well in weak periods of the economic cycle. We have capitalised on recent corrections in sovereign bonds to increase their weight from 20% in late April to 33% currently.
The increase in sovereign debt has been effected mainly through debt from core countries like the US, France, and Germany, which typically act as havens assets in episodes of market correction. We have also extended the duration of the portfolio slightly as we approach the end of the central banks’ rate-hike cycle. The duration is still moderately low, ranging from 2.3 to 2.5. We may raise it to 3 in the months ahead.
EDM Ahorro Clase L has performed well this year (+3.27% at the August close), exceeding its benchmark index (European short-term fixed income) by 160 bps. The fund ranks second in its category (according to Expansión’s rating of 131 funds).
We maintain that EDM Ahorro is a highly attractive alternative for conservative investors. The fund currently offers an average return of 4.2%, with very defensive, high quality portfolio positioning.
Karina Sirkia,
Fixed Income Fund Manager
