Portfolio manager comments — Q2 2024
The quarter was marked by dramatic circumstances in the European fixed income markets. At the end of the quarter, president Macron made the decision to dissolve the National Assembly and call for a new election in France after his party’s poor election results in the European Parliament election held in June. This created uncertainty in the financial markets and the interest rate spreads between French and German widened to the highest level since the euro crisis in 2011 when the risk premium required by lenders to extend loans to France increased sharply. The reason is that there are concerns about a period of political chaos ahead, at the same time as the French government is struggling with a growing budget deficit and high government debt. This also led to an increase to the risk premium in peripheral countries such as Italy and Spain. This movement benefited the fund’s returns relative to index given that the fund previously had an underweight in Italy and sold its French government bonds directly following Macron’s dissolution of the parliament.
Global rates rose during Q2, driven by strong consumers and concerns about a persistent inflation. This led the market to price in additional rate cuts from the US central and the European Central Bank, even though the latter had cut the rate in June.
During the quarter the fund held a smaller position for lower medium-term rates in Germany, which weighed on returns. We also believe that long-term rates will hold, despite cuts to key rates, due to an increased supply and higher risk premiums. As a result, the fund is retaining significant positions for steeper yield curves between two and ten years in Europe. These contributed positively to returns during the quarter.