MARKET UPDATE
Impact bond issuance remained constructive but uneven in May, as renewed rates volatility and higher sovereign yields tempered primary activity. Episodes of risk-off driven by energy-led inflation prompted more selective market access, although higher-quality issuers continued to execute successfully, often attracting strong oversubscription. Overall volumes appeared stable rather than accelerating, consistent with a broader consolidation phase for sustainable debt markets.
Supply was again led by sovereign, supranational and financial issuers, including benchmark green deals and repeat issuance. Corporate activity remained more cautious, and emerging market issuance was mixed: some issuers accelerated green financing to address elevated energy costs, while others faced tighter external conditions.
Investor demand stayed resilient and highly selective. Large order books for high-quality green bonds highlighted structural demand, though scrutiny around frameworks and impact credentials continued to intensify alongside evolving regulation.
May saw renewed volatility driven by a sharp repricing of inflation risk. Escalating Middle East tensions and sustained disruption to energy supply pushed oil prices higher, triggering a global bond sell-off and lifting long-end yields to multi-year highs, with 30-year US Treasuries briefly being above 5%. Core yields moved decisively higher overall, despite episodic rallies on intermittent ceasefire optimism.
Credit proved relatively resilient. Investment-grade and high-yield spreads retraced earlier widening and remained historically tight, supported by still-solid fundamentals and attractive all-in yields, though late-month rate volatility led to some widening. EM debt faced renewed divergence, with oil importers pressured by deteriorating fiscal and inflation dynamics, while exporters continued to benefit from elevated terms of trade.
Central banks held a cautious, increasingly hawkish stance. The Fed remained on hold amid split internal views, with markets reassessing the risk of further tightening rather than imminent cuts. Overall, May marked a shift back to inflation dominance, pressuring duration but sustaining carry appeal.
Portfolio Positioning
The fund outperformed the benchmark (0.83% vs 0.67%) predominantly due to our positioning in spread product in US dollar denominated bonds, given the resilience of credit spreads during the month. Our small overweight duration positions in Australian and New Zealand dollar denominated bonds also proved to be beneficial, as yields traced lower in these markets over the period. This positive performance was offset slightly by our security selection in Japanese yen denominated bonds, and our underweight duration position in China, but the effects were small. This brings the since inception return of the portfolio to 1.27% vs 1.12%.
In bond market terms, we are overweight the dollar bloc, underweight Asia, and close to neutral in Europe. The fund’s overall duration position now has a slight overweight bias. 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 is close to a neutral duration position in the US, as the fears have increased of weaker growth and higher inflation going forward due to increasing geopolitical instability.
During the month with the rate volatility, we rotated some duration exposure from European and Australian bond markets into US dollar and Japanese yen bond markets respectively. The rolldown in Japan looks increasingly attractive especially at the long end of the curve.
Despite the ongoing conflict, we participated in 3 new deals in the primary market during May. We purchased two green bonds from KBC and ING, and one sustainability bond from ANZ. Use of proceeds from the ING green bond will go towards renewable energy generation and green buildings. ING have a strong track record of green bond issuance and impact reporting.
Contributors
• Security selection in US dollar denominated bonds
• Small overweight duration position in Australian dollar denominated bonds
• Small overweight duration position in New Zealand dollar denominated bonds
Detractors
• Underweight duration position in Chinese renminbi denominated bonds
• Security selection in Japanese yen denominated bonds
condividi.