MARKET UPDATE
Issuance in the impact bond market experienced a slight decline compared to both the previous month and the same period last year. Bonds were issued by various entities across different maturities, ratings, and currencies. Supranational issuers and government related agencies showed particularly robust issuance, with key contributors including the International Bank for Reconstruction and Development (IBRD), the European Investment Bank (EIB), and SNCF. Several well-established names, such as SEB, Swedbank, Iberdrola, Tokyu Fudosan and Severn Trent also entered the market last month. There was also new US dollar denominated issuance from Aldar Investment Properties, LG Energy Solutions and Greenko.
Chinese issuers continue to represent a strong segment of the market, with entities such as China Southern Power, Chongqing Rail Transit, and Yangzhou City Construction Group issuing bonds throughout the month. Additionally, there was some issuance from below investment-grade issuers, including Sappi Papier, Getlink, and Starwood Property.
The new administration’s rapidly changing tariff narrative and concerns of the health of the US economy triggered rate volatility and injected turbulence into global markets. As the month progressed, bond prices slumped, and spreads widened as an escalation of the Trump administration’s trade war fuelled “stagflation” fears. Major central banks took divergent monetary policy actions amid varying economic conditions. ECB implemented a rate cut, while the FED and BoE maintained rates with cautious outlooks.
In European markets, US tariff threats and fears of a slowdown in US and global growth challenged markets. Early in March, spreads were relatively low, around 0.85bps. However, by late March, spreads began a sharp upward trend, particularly in lower-rated longer dated credits.
Elsewhere, in Asia, markets were hit by a 25% tariff on steel and aluminum, as well as tariffs on semiconductors, pharmaceuticals, autos, and agricultural products. Notably, the BoJ maintained a hawkish stance due to persistent inflation concerns.
Portfolio Positioning
The fund performed roughly in line with the benchmark over the month (0.63% vs. 62%), with some small negative relative performance coming from security selection in US dollar, UK sterling, and euro denominated bonds, bringing the since inception return of the portfolio to 0.63% vs. 0.57% for the benchmark. This decline was partially mitigated by individual security selection in Chinese renminbi bonds and curve positioning in US dollar-denominated bonds. Additionally, the small overweight position in Norwegian Krone positively impacted relative performance.
In bond market terms, we are slightly underweight the dollar bloc, underweight Asia, and overweight Europe, although the sizes of these positions have been reduced recently. The fund’s overall duration position is now largely neutral. In China we have a small underweight duration position, given the low level of yields in a global context and recent growth supportive economic measures. The fund has now pivoted to a small overweight duration position in the US, as the fears have increased of weaker growth going forward due to tariffs and other isolationist policies.
Within Europe, we hold small overweight positions in the Norwegian krone, Swedish krona and UK Sterling denominated bond markets.
During the course of the month we added some more green MBS, bringing our total exposure to above 9%. We also extended duration slightly in China to reduce the size of our underweight position.
We have been highly active in the primary market, purchasing several green bonds, including offerings from Aldar, LG Energy and ETSA. The latter serves as the principal finance vehicle for SA Power Networks, a pureplay transmission and distribution operator in South Australia. Bond proceeds are aimed at financing projects that promote environmental sustainability, such as renewable energy and energy efficiency initiatives.
Contributors
• Security selection in Chinese renminbi-denominated bonds
• Curve positioning in US dollar denominated bonds
• Overweight position in Norwegian Krone
Detractors
• Security selection in US dollar denominated bonds
• Overweight weighted duration position in euro denominated bonds
• Overweight weighted duration position in sterling denominated bonds
