In this environment of lower interest rates and suppressed yields globally, we believe there will be a "hunt for yield" which will reward allocations to selected emerging market bonds, credits and sovereign bonds. For instance, the fund's large allocation to Italian sovereign debt remains and will be driven by global demand for positive real yields in USD-hedged terms.
Fundamentals are not the key driver of markets at present. If they were, we would have seen a significant economic improvement globally to justify equity markets rising by more than 10% year-to-date. Instead, global markets are reacting to a huge change in expectations of monetary policy in both the US and the EU. We believe this change in expectations is justified and the US Federal Reserve has the ability to cut interest rates, and president Trump is providing the incentive.
We have reduced risk largely through hedging rather than physical bond sales. The primary reason for this is its temporary nature - we can and will seek opportunities to remove it. The hedges were increased in size to mitigate volatility associated with specific events: the major central banks' July meetings. They were left in place as we entered a period of seasonally low liquidity when market volatility could elevate. They have therefore served us well and been actively managed through the early August volatility fuelled by an escalation of trade tensions.
We will look for opportunities to remove the hedging and allow our risk positions to continue to add value to the fund over the remainder of the year. Our view has been that fundamentals are weakening and the prospect of a trade deal in the short term is very low.
Richard "Dickie" Hodges is manager of the Nomura Global Dynamic Bond fund