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Net performance was positive at +1.07%, marking a continuation of the excellent Q1 performance. The strategy as a whole is benefiting from the current uncertain environment. These returns are consistent with our maxim “survive and thrive” – where we look to manage risk through periods of extreme turbulence and monetize opportunities after the event. The month of May has seen things largely calming down and mean reversion adding positive alpha.
Tariffs of 50% on Europe, that were later suspended, unnerved the market yet again and earnt Trump the TACO meme. Undeterred, the Trump administration focussed on the metals sector, targeting aggressive tariff levels on imported steel and aluminium. This move combined with the legal opinion on the validity of using emergency powers to enact executive orders has added another layer of confusion to markets and participants.
The portfolio added 2 new strategies while 1 stopped out and 2 trades expired.
Curve positions contributed +22bp to performance. The performance mainly came from a flattening of the UK gilts and linker curves along with a similar move in the long end of NZ government bonds.
Duration was a draw of -29bp. This was nearly exclusively due to the elevated May inflation data for the UK snuffing out any follow on cut at the June meeting and decreasing odds of an August MPC cut to only 50% of a 25bp move lower. The fact that the BoE Chief Economist voted for no cut in the May meeting against the majority of the committee also lessened future odds.
FX positions were net flat over the month with no discernible moves to report.
Inflation positioning resulted in a +17bp contribution over the month. Mostly due to lower EU HICP expectations vs US CPI in longer dated maturities.
Spread positions were again the biggest contributor with +35bp. This was mainly due to a reversal of the Italian BTP 10y 30y spread curve and the 7y to 15y sector of the JPY spread curve that had both been a draw the previous month. EUR long end 3s6s basis continued to perform. A small draw was experienced in the UK Gilt forward spread.
Volatility positions continued to perform with a positive performance of +23bp. The largest contribution came from the significant uptick in uncertainty increasing the level of premiums on these insurance-like products. Volatility price increases were captured in the JPY 20y sector, AUD 10y sector and CAD 10y sector.
Cross Currency Interest Rate positions were a small positive add of +5bp. The main contribution came from GBP flattening vs US, only to be largely offset by UK rates continuing to underperform their SEK counterparts.
