Optimizing A Symmetrical Payoff – Fixed Income Monthly

The Fund performed in positive territory amidst a month where credit spreads were dominated by macro news. We see some tweaks to the big picture. The previous heightened rate vol has taken a back seat this month with both 10yr UST and German Bund retreating to the sub 1.25% and -0.45% area by the end of the month. The ECB dovishness on its forward guidance further strengthened the comfort zone for EUR credit. Meanwhile, the overall stretched asset valuation was vulnerable to the periodic volatility in the commodity space and China’s crackdown on certain domestic sectors (tech, tutoring and food delivery). Thanks to the relatively elevated carry (currently at 260bps) and shortened credit duration (currently at 3.7yrs) as well as limited rates exposure (hedged to 1-2 years by mandate), the long book was able to generate positive total returns with limited volatility.