Impact from US interest rates
April’s initial focus was on Russia, after the US extended sanctions to a number of new individuals and companies at the beginning of the month. These were mainly companies linked to oligarch Oleg Deripaska.
The Russian risk premium rose, and spreads widened for Russian credit overall and for Deripaska-linked credit in particular. Although the market recovered fairly quickly, it is fair to be paid for the political risk in Russia, which tends to make itself felt on a regular basis. We are comfortable with the Russian bonds we are exposed to today, and we had already reduced our exposure to the country before the movement resulting from the extended sanctions.
In the second half of April, bonds in emerging markets were more affected by an uptick in US market interest rates. The US 10-year bond crept above 3 percent, which is a psychologically important level. Although Carnegie Emerging Markets Corporate Bond maintains a short interest rate duration compared to much of the market, the fund is still affected by large movements in US interest rates as the dollar is the most common currency for companies issuing bonds in the world’s emerging markets. During April, this movement led the fund to fall by 0.39 percent.
There were a number of transactions in the portfolio, mainly in the secondary market, and we divested a bond in internet company Baidu that was close to maturity and also sold some of Chinese-owned Volvo Cars after the bond performed very well. In Korea, we participated in an issue in telecom company SK Telecom, and in banking and finance we reduced our exposure to Bank of China and instead took on exposure to South African bank First Rand, which pays approximately 6 percent in USD for a bond that is subordinated to the bank’s senior borrowing.
The Carnegie Emerging Markets Corporate Bond portfolio is well-diversified between investment grade and high yield credits. It has good geographical spread and relatively low interest rate risk. We further reduce volatility in the fund by currency hedging holdings in the portfolio.