Strategic Global Bond Fund

Key points

• Management responsibility for the fund was taken over by Mark Astley of Millennium Global Investments on 13 September 2006.
• The Fund has a “sophisticated” UCITS III structure and risk management processes.
• Sector: IMA Global Bonds

Current Views

Global reduction in risk and de-leveraging intensified, keeping markets dysfunctional. Funding pressures and counterparty risk rose further, with the Treasury-Eurodollar spread (which measures the comparative risk between the US government and US banks) reaching a high of 464bp in early October. The dislocation in credit markets was exacerbated and global equity market volatility increased sharply. An emerging market crisis unfolded as rollover risk of private sector debt materialised. This renewed deterioration prompted an unprecedented coordinated worldwide central bank rate cut (-50bp), government intervention in the banking sector throughout Europe, the opening of swap lines by the Fed for a few emerging markets as well as IMF support. While policy response was forceful and helped to ease market stress later in the month, global risk aversion remained elevated, reflecting the negative global economic outlook.

The USD benefited further from position unwinds, despite a deepening economic recession. Amid a weakening labour market, tightening financial conditions and further destabilisation from the housing sector, consumer confidence collapsed, pointing to a bleak outlook for consumer spending after recording its biggest contraction since the 1980s in Q2 (-3.1% QoQ annualised). Despite the large increase in the Fed balance sheet, deflation, not inflation, has been the key market concern, as reflected in the collapse in 10-year breakeven inflation below 1%. This in turn allowed for a cumulative Fed cut of 100bp during the month without triggering negative implications for the USD.

The Eurozone outlook was further downgraded, opening the door for additional monetary easing. The decline in the German IFO and PMI surveys pointed to a severe downturn, especially while the leeway for fiscal stimulus stays limited.

In the UK, weak retail sales data, a rise in unemployment and falling PMIs focused attention on the likely depth of recession and the need for much lower interest rates after GDP contracted in Q2 (-0.5% QoQ). As a result, GBP fell by as much as 5% on a trade-weighted basis before recovering somewhat in the last week of the month.

Global government bonds markets rallied across the board with European and UK bond markets outperforming the US as the European continent became increasingly dragged down by the financial whirlwind and housing distress in the United States. Bond yields reacted accordingly.