Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Investment Institute
Fixed Income

AXA Global Strategic Bond Fund: US treasury curve steepens


Key points

  • Markets are pricing in impressive growth forecasts for major economies in 2021
  • This is impacting on expectations for short-term inflation and future interest rates
  • Yield curves have steepened as a result, with long-dated government bonds hit hardest

What’s happening?

The “reflation trade” continued during March, with government bonds, particularly in the US, hardest hit. In the UK, 10-year gilts hit a yield of 0.88%, levels not seen since before the global pandemic over 12 months ago.

Long-dated bonds underperformed and the US treasury curve steepened as future interest rate rises are priced in, albeit expectations for short-dated interest rates remain stable. The Federal Reserve reiterated the intention to keep official rates on hold for the foreseeable future.

Vaccine rollout continues at speed in the UK and US, with Europe lagging but expected to pick up over coming months. The US pandemic fiscal stimulus also got passed and provided further support to risk markets.

The unwind of a large, leveraged, Asian-focused hedge fund, and the supply chain disruption through the Suez Canal blockage, failed to dent investor confidence.

Portfolio positioning and performance

Defensive (40%): we remain cautious on duration with a low 2-year exposure and a focus on trying to preserve capital. The strategy benefitted from low US duration and a bias towards the steepening of long-dated assets. We increased our exposure to inflation-linked bonds to benefit from higher break-evens, which did well during March.

Intermediate (26%): exposure remained constant around 25%, but we rotated out of financial bonds into non-financial new issuance. We retain a preference for European investment grade, with a bias to lower-rated BBB assets.

Aggressive (34%): small reduction to emerging market debt exposure in favour of developed market high yield. Higher government bond yields, and a pick-up in Asian debt and Turkish volatility, added to the weaker sentiment around emerging market debt.

Outlook

In the short term, there is positive momentum around risk assets and a growing consensual view that government bond yields will head higher. Expectations for inflation are on the rise, although we believe that this will be relatively transitory, as short-term base effects will be offset by the longer-term deflationary pressures of globalisation, technology and demographics.  

There is also growing evidence of a pick-up in leverage in capital markets, which is starting to show some signs of volatility and small pockets of weakness. While we continue to prefer risk assets over high quality government bonds, we are focused on the fact that government bond valuations have improved, whereas spreads and yields further down the credit curve have got more expensive.

Over the coming months, there could be an opportunity to improve the quality of the portfolio and once again hedge against a potential increase in volatility further down the line.

No assurance can be given that the AXA Global Strategic Bond Fund will be successful. Investors can lose some or all of their capital invested. The AXA Global Strategic Bond Fund is subject to risks including counterparty risk, derivatives risk, geopolitical risk, interest rate risk, securitised assets or CDO assets risk, emerging market risk, liquidity risk, credit risk, risks linked to investments in sovereign debt, high yield bonds risk and contingent convertible bonds (“CoCos”) risk. Further explanation of the risks associated with an investment in this fund can be found in the prospectus.

Download the full article
Download article (290.65 KB)
Fixed income

What is unconstrained fixed income?

This provides the potential flexibility to capitalise on opportunities across the fixed income spectrum as and when they arise

Learn more

Visit the fund centre

Visit our fund centre to find out more about our strategies.

Fixed Income
Global strategic bond strategy

The aim of the Fund is to generate income and growth over the medium term.

View funds

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Fixed Income

Why flexible investing may help overcome obstacles

Fixed Income

Themes in focus for Global Strategic Bonds

Fixed Income

New opportunities for bonds as the rules of the game evolve

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. The strategies discussed in this document may not be available in your jurisdiction.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee that forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.