T. Rowe Price Dynamic Global Bond (ETL0398AU) Report & Performance

The portfolio’s duration ended the period at around three years, lower than the previous month.

This was driven mainly by decreasing our long duration bias in the U.S., particularly in the front end and the intermediate segment of the curve due to strong growth data. Broadly, we maintained a steepening bias in U.S. longer-dated maturities.

In the eurozone, we broadly moved to a neutral stance on eurozone duration and implemented a steepening bias on the yield curve due to a mixed macro landscape and as policymakers committed to a “datadependent approach” to future rate decisions.

In the UK, we reduced our short duration bias, mainly via trimming our short duration exposures at the long end of the gilt yield curve due to lower-than-expected inflation data.

Among other high-quality countries, we added to a short duration stance in Japan on expectations that the Bank of Japan’s policy change will pressure bond yields higher. Elsewhere, we reduced our long duration stance in Australia and removed a long duration position in Canada.

We maintained exposures to inflation-linked bonds and swaps in the U.S., the UK, and Germany where we believe core inflationary pressures are likely to remain sticky.

In emerging markets, we trimmed our long duration positions in Brazilian and Hungarian local currency government bonds. Elsewhere, long positions were added in local currency government bonds in Mexico and the Czech Republic. Long positions were maintained in the local currency government bond markets of South Korea, Thailand, South Africa, Colombia, Serbia, Chile, and Indonesia.

The portfolio’s duration ended the period at around five years, higher than the previous month.

This was driven mainly by increasing our duration bias in the U.S., particularly in the belly of the curve as we believe the risks of a recession are growing. Broadly, we increased a steepening bias in longer-dated maturities.

In the eurozone, we broadly maintained our short duration stance as the European Central Bank (ECB) reaffirmed its hawkish rhetoric despite growing economic headwinds. Broadly, we maintained our short duration stance in Germany and France as we expect interest rates to remain on an upward path.

In the UK, we increased our short duration bias, mainly via closing our long duration exposures at the short end of the gilt yield curve as the Bank of England implemented a larger-than-expected interest rate increase and warned more rate hikes were needed to dampen sticky inflationary pressures.

Among other high-quality countries, we kept our long duration positions in New Zealand, Australia, Israel, and Canada on growing concerns of a broadening economic slowdown.

We maintained exposures to inflation-linked bonds and swaps in Germany, U.S., and the UK where we believe core inflationary pressures are likely to remain sticky.

In emerging markets, we trimmed our long duration positions in Brazilian and Hungarian local currency government bonds. Elsewhere, long positions were maintained in the local currency government bond markets of Mexico, South Korea, Thailand, South Africa, Colombia, Serbia, Chile, and Indonesia.

The portfolio’s overall duration ended the period long duration with exposures, mainly driven by moving to a long duration position in the U.S.

as the Federal Reserve nears the end of its monetary tightening campaign. In the eurozone, we trimmed our short duration stance by reducing our short duration in the long end of the German bund curve as headline inflation slowed in May. We opened a short duration stance in France and maintained our long duration position in Italy.

In the UK, we moved to a short duration stance by introducing a curve steepening bias as inflationary pressures remain persistent in the backdrop of an upcoming heavy issuance calendar.

Among other high-quality countries, we maintained our long duration positions in Australia, New Zealand, and Canada. We held exposures to inflation-linked bonds and swaps in Germany and the UK where core inflationary pressures are likely to remain sticky, in our view.

In emerging market bonds, we reduced our long duration position in South African local currency bonds due to geopolitical concerns and a hawkish central bank. We introduced a long duration position in Chile as President Gabriel Boric was dealt a significant setback to his progressive reform agenda. We also added to a long duration position in Colombia and introduced a short duration position in Poland. Elsewhere, long positions were maintained in the local currency government bond markets of Brazil, Romania, Serbia, India, Philippines, Hungary, and Malaysia.

In currencies, we shifted to a tactical long on the U.S. dollar given a combination of positive short-term data flow as well as positioning and technical dynamics. We continue to believe, however, in the U.S. dollar regime change and hold a bearish view on the currency in the medium term. Among key moves, we shifted to a negative bias on the euro.

Elsewhere, we closed long positions in the Brazilian real, Mexican peso and the Hungarian forint. We also opened a short Chinese yuan stance as economic data deteriorated and shifted to a short position in the South African rand.

Within sectors, we remain cautious on the credit outlook as likely weakening economic growth and tightening liquidity conditions, especially in the U.S., could weigh on fundamentals. Accordingly, at the end of May, we increased our defensive credit hedges in U.S. high yield and investment grade via synthetic credit instruments. We also increased our defensive credit hedges in European high yield.

Throughout, we continued to isolate credit selection from market beta as a potential source of alpha with short-dated investment-grade credit attractive from a risk-adjusted yield basis.

The portfolio’s overall duration ended the period with under one year of duration. We continued to have a short duration position expressed in the U.S. as still-high inflation will likely keep interest rates higher for longer, in our view. In the eurozone, we trimmed our short duration stance by shifting to a long duration stance in Italy due to attractive valuations. However, we maintained our short duration stance in Germany on expectations of more policy tightening.

In the UK, our modestly long duration position was reduced in the latter half of the period as stronger-than-expected inflation data and tight labor markets raised expectations of more interest rate increases by the Bank of England. Among other countries, we increased our long duration position in Australia as policymakers kept interest rates unchanged at a policy review in April.

In other moves, we increased our short duration position in the intermediate section of the yield curve before a policy review by the Bank of Japan. We held exposures to inflation-linked bonds and swaps in Germany where core inflationary pressures are likely to remain sticky, in our view.

Bond markets broadly rallied in March as developments in the U.S. regional banking sector and some European banks fueled demand for safe-haven assets including sovereign bonds. Within duration management, short duration stances in the U.S., the UK, Italy, and Japan had a negative impact on performance as bond yields declined broadly in the backdrop of banking sector stress. An allocation to eurozone inflation breakevens also detracted. However, our long allocations to Mexican, New Zealand, Brazilian, Hungarian, South Korean, and Australian local currency government bonds supported performance.

In currency markets, the U.S. dollar weakened as expectations grew that the Federal Reserve would signal a pause in its monetary policy tightening campaign. The dollar also failed to benefit from a broad wave of risk aversion in global markets in March. The developments resulted in gains for our long position in the Colombian peso and a long Japanese yen position expressed using options. A short position in the Taiwanese dollar also supported performance. However, our long position in the Australian dollar weighed on performance.

Within sectors, the portfolio’s risk-seeking positions expressed in credit and equity markets contributed to performance as market sentiment improved in the second half of the month. In particular, exposures to U.S. and European high yield via credit derivatives supported. However, exposures to select U.S. high yield bonds weighed on performance.

The portfolio’s overall duration ended the period in negative territory. This was driven in part by adding to a short duration position in the U.S. due to a strong labor market and still-high inflation data.

Within the eurozone, we broadly maintained our overall short duration posture as we kept short duration positions in Germany and Italy on expectations of more ECB policy tightening. In the UK, our short duration position was maintained as we see the challenging backdrop of high inflation, and increased gilt issuance driving yields higher.

Among other countries, we trimmed a long duration position in Australia. Elsewhere we opened a new Japan long adding exposure in the long end of the curve. We also added to our long duration position in New Zealand and switched to a long duration stance in Canada. Elsewhere, we maintained long duration allocations in Israel and South Korea throughout. By contrast, we held to a short duration stance in China.

We held exposures to inflation-linked bonds and swaps in Germany where core inflationary pressures are likely to remain sticky, in our view. In emerging market bonds, long positions were maintained in the local currency government bond markets of Brazil, Mexico, Romania, Serbia, India, Hungary, South Africa, Malaysia, and the Czech Republic.

In currencies, our long U.S. dollar position was reduced as we pivoted toward implementing relative value positions. Among key moves, we moved to a short position in the euro and removed a short position in the Swedish krona. We opened a long position in the Australian dollar while we maintained a short position in the New Zealand dollar. Elsewhere, we added to our short position in the British pound.

Within sectors, we remain cautious on the credit outlook, with the Fed still needing to tighten further amid persistent inflationary forces. Accordingly, at the end of February, we held defensive credit hedges in the portfolio with short positions expressed via synthetic credit instruments in U.S. and European high yield. However, we removed our defensive positions via synthetic credit instruments in U.S. investment grade.

Throughout, we continued to isolate credit selection from market beta as a potential source of alpha with short-dated investment-grade credit attractive from a risk-adjusted yield basis.