Monthly Commentary June

GAM Star Credit Opportunities (USD)

During the month of June, markets turned stronger following dovish comments by both the ECB and the Fed. This has led to a strong rally, and spreads within our securities have tightened during the month. However, we still feel our valuations remain very attractive and should further benefit from the strong and improving credit fundamentals of the companies in which we are invested. Government bond yields have continued to significantly come down during the month, as we have seen for example the 10 year US Treasury finish the month at 2%. As such, we feel we are very well positioned as we are capturing spreads well above 300 bps within our fund. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Supply remains a positive technical and transaction issued year today been extremely attractive.  For example, Barclays came with a new AT1 GBP deal in early June, in part to refinance deals which have call dates within the next year. They issued GBP 1 bn at a coupon of 7.125%, callable in 6 years. This means that it came at a spread of 6.579% above gilts. If not called in 6 years it refixes at a spread of 6.579%. There was approximately GBP 5 bn of demand for that deal and it is currently trading higher.

One area in our fund that has underperformed during the month, due to lower rates, are the Discounted Floating rate notes (FRNs) that we own in order to protect the fund against interest rates. A dovish tone by central banks put further pressure on rates and since coupons on FRNs are reset based on these, price of FRNs declined in order to adjust for their potential lower future income and this independent of the credit quality of the issuers. We view our allocation to FRNs as a hedge against interest rates and consequently are not looking to change this exposure. What the market is also completely ignoring for now is that these instruments have been issued under Basel II and Solvency 1 and as these do no comply with new regulatory framework (so-called legacy/grandfathered bonds), the optionality of these bonds in terms of having issuers tendering or calling them over the coming quarters/years at a significant premium to current prices is material.

The fund is well positioned to capture high and predictable income and given the attractive valuation levels; we feel that the fund has scope to benefit from further capital gains.

 

GAM Star Credit Opportunities (GBP)

During the month of June, markets turned stronger following dovish comments by both the ECB and the Fed. This has led to a strong rally, and spreads within our securities have tightened during the month. However, we still feel our valuations remain very attractive and should further benefit from the strong and improving credit fundamentals of the companies in which we are invested. Government bond yields have continued to significantly come down during the month, as we have seen for example the 10 year Gilts finish the month at 0.83%. As such, we feel we are very well positioned as we are capturing spreads well above 400 bps within our fund. Moreover, the lower government bond yields make the income aspect of our portfolio even more attractive on a relative basis.

Supply remains a positive technical and transaction issued year today been extremely attractive. For example, Barclays came with a new AT1 GBP deal in early June, in part to refinance deals which have call dates within the next year. They issued GBP 1 bn at a coupon of 7.125%, callable in 6 years. This means that it came at a spread of 6.579% above gilts. If not called in 6 years it refixes at a spread of 6.579%. There was approximately GBP 5 bn of demand for that deal and it is currently trading higher.

The fund is well positioned to capture high and predictable income and given the attractive valuation levels; we feel that the fund has scope to benefit from further capital gains.

GAM Star Credit Opportunities (EUR)

June was a very strong for credit, driven by central banks that surprised investors in terms of their dovishness and that somewhat alleviated fears related to political headlines as well as macro data. In an environment where central banks respond to negative news by turning more dovish, “bad news become good news”.

 

Dovish stance by central banks put further pressure on rates (US Treasury at 2% and German Bund at -0.3%) and increased the level of negative yielding assets to unprecedent levels (USD 13 trillion and growing) as well as drove further rally on spreads – creating further support for high yielding bonds.

Draghi could not have been clearer during a speech given in Sintra (18JUN) i.e. “in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” As inflation expectation keeps on getting lower (see below graph, EUR Swap 5Y5Y), ECB will have to use all available tools, QE included. Interesting is that the European Court of Justice recently confirmed that QE is a legal instrument of monetary policy by the ECB.

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