BNY Mellon International Bond Fund Q2 2024 Commentary
KanawatTH
Market Review
The second quarter saw a mixture of news on inflation, with some instances of headline rates unexpectedly rising, and leading to markets reassessing the potential and timetable for rate cuts ahead. Core inflation rates have tended to continue to ease, but frequently, at a more gradual rate. Data on economic growth remains mostly modest, with many leading indicators appearing to flatten or even decline slightly. Few are indicating any significantly acceleration in activity is imminent. After elections in some key emerging markets, attention, and in some cases, concerns turned to elections in France, the UK, and to some extent, the US election in November, and whether the Federal Reserve (the “Fed”) will be able to act to cut rates before then.
Performance Summary
For the quarter ended June 30, 2024, the Fund’s Class I shares returned -2.05%, excluding sales charges. In comparison, the Fund’s unmanaged benchmark, the Bloomberg Global Aggregate USD Hedged Index, returned – 2.11% for the same period.
Average Annual Total Returns (6/30/24)
|
Share Class / Inception Date |
3 Month |
YTD |
1 Year |
3 Year |
5 Year |
10 Year |
|
Class A (NAV) 12/30/05 |
-2.10% |
-4.64% |
0.58% |
-6.70% |
-3.50% |
-1.52% |
|
Class A (4.50% max. load) |
-6.48% |
-8.94% |
-3.96% |
-2.32% |
-4.39% |
-1.97% |
|
Class I (NAV) 12/30/05 |
-2.05% |
-4.54% |
0.73% |
-6.47% |
-3.23% |
-1.16% |
|
Bloomberg Global Aggregate ex USD Index (Unhedged) |
-2.11% |
-5.26% |
-0.66% |
-7.48% |
-3.56% |
-1.86% |
|
Returns are net of fund expenses and assume reinvestment of distributions. The performance data quoted represents past performance, which is no guarantee of future results. Share price and investment return fluctuate, and an investor’s shares may be worth more or less than original cost upon redemption. Current performance may be lower or higher than the performance quoted. Performance for periods less than 1 year is not annualized. Go to BNY Mellon Investment Management – Global Home – English for the fund’s most recent month-end returns. Returns assume the reinvestment of dividends and capital gains, if any. |
Total Expenses (6/30/24)
|
Share Class |
Gross1 |
Net2 |
|
Class A |
1.10% |
1.02% |
|
Class I |
0.77% |
0.77% |
|
[1] Gross expenses is the total annual operating expense ratio for the fund, before any fee waivers or expense reimbursements. [2] Net Expenses is the total annual operating expense ratio for the fund, after any applicable fee waivers or expense reimbursements. The net expense ratio(s) reflect a contractual expense reduction agreement through 3/1/2025, without which, the returns would have been lower. The Net Expenses is the actual fund expense ratio applicable to investors. Not all classes of shares may be available to all investors or through all broker-dealer platforms. |
Government bond yields generally moved higher in the second quarter as expectations for looser monetary policy were challenged by stubborn levels of headline inflation and robust labor market data, which gave policymakers pause for thought, particularly the US Federal Reserve. The yield on 10-year US Treasuries rose by 20 basis points (bp) to 4.40%, while expectations for the first interest rate cut have been pushed back to September, or possibly later. In the eurozone, German 10-year yields also increased by 20bp, to 2.50%, while fiscal and political concerns in France drove 10-year yields up by 49bp to 3.30%. UK gilt yields were similarly affected, rising 24bp to 4.17% and in Japan, 10-year government yields increased markedly, rising 33bp to 1.06%, the first time they have been above 1% since 2011. Emerging markets also weakened during the quarter, with the yield on the JPMorgan Emerging Market Bond Index moving higher by 39bp to 6.56%.
Credit market returns primarily influenced by the weakness in government bonds, with flat to negative excess returns generally prevailing. Spread levels widened slightly, having tightened substantially over many previous months towards the lower end of the historic range. The option adjusted (OAS) spread over governments for the investment grade (IG) Bloomberg US Aggregate (Agg) Corporate Index edged wider late in the quarter, ending at 94bp, an increase of 4bp. The Bloomberg Euro Agg Corporate Index was 6bp wider at 120bp and the Bloomberg Sterling Agg Corporate Index was 4bp wider at 123bp. High yield markets followed suit, widening modestly overall. The spread on the Bloomberg US Corporate High Yield Index, spreads moved up by 10bp, 309bp, while the Pan-European High Yield Index was 12bp wider, at 359bp.
The Bloomberg US Investment Grade Corporate Index generated excess returns of -4bp for the quarter, with June’s setback offsetting the positive contributions of April and May. There was a broad range of counterbalancing contributions, with some of the strongest excess returns being seen in airlines, home construction, cable satellite, banking, and finance companies. Of those that were a drag on excess returns, media entertainment, oil refiners, integrated energy companies, restaurants, and health insurers were among the weakest performers.
Performance Review
The Fund outperformed the Index in the period. In rates, outright durations trades were flat over the quarter with an underweight in Japan generating positive returns, while overweights to the US and Germany underperformed. Cross market positions slightly outperformed in aggregate led by overweight positions in Korea against the US and Japan, and overweights to local emerging markets against the US and Europe. Within Europe, the strategy’s overweight to Italian sovereign risk relative to Germany also outperformed, while underweight positions in Canada against the US underperformed. The bulk of outperformance from rates in the second quarter can be attributed to the strategy’s positioning for higher 30-year US inflation, lower 30-year European inflation, and lower 10-year UK inflation which all generated positive alpha. Additionally, yield curve steepeners in Germany contributed slightly to outperformance.
Market Outlook
We continue to see the growth picture stabilizing and continuing to improve slowly. This is evidenced by global PMIs being above 50 for the last few months. However, we note some areas of concern and remain vigilant for further weakness. The environment of rising real interest rates appears likely to be replaced soon by a backdrop of falling real rates, as rate cuts materialize and the decline in inflation levels out. Those conditions have historically been positive from a cyclical perspective. If inflation remains sticky, the orderly moderation in activity could slow or truncate the monetary easing cycle. Regarding inflation, there is a chance that wages remaining fairly high could make further downside to the existing trend hard to achieve, particularly as the base effects that were helping to drive inflation rapidly lower last year are no longer in play.
Economic growth in the US continues to exceed that of other developed market economies, but we believe that a moderation may be beginning, which will eventually see a gentle, though modest slowdown in activity into 2025. The sharp decline in consumer sentiment in recent months and the surprisingly soft retail sales data in May could be indicative of that deceleration beginning. Inflation is expected to slowly moderate further. The ongoing strength of the labor market is one reason why the Federal Reserve has shied away from easing interest rates already. We believe that policymakers will likely wait until the September meeting to cut rates, probably by 0.25%, and to follow that with further reductions. We believe that short-term US Treasury yields are likely to fall further than longer-dated yields.
Europe’s recovery appears to be led by the periphery, which has helped the region avoid recession. The manufacturing sector has been under pressure for some time, but we now see tentative signs of recovery. Additionally, the steady but slow improvement in consumer confidence is also likely to be supportive. The labor market remains relatively resilient and as long as wage pressures are not fed through to prices fully, we believe inflation will continue to ease toward the target level, though only gradually. We see official interest rates at or below 3% in a year’s time, with shorter-term government bond yields at around 2.2%, while yields at longer maturities remain a little higher than that. The fiscal deficit and debt situation in France are risks that have the potential to cause market turbulence, particularly when combined with the political uncertainty that could arise following the election.
In the emerging markets, we have revised our growth forecast for China modestly higher again, now expecting 4.8% growth in 2024, but retain our expectation for a deceleration in 2025. Our outlook remains a little less optimistic than the market consensus for both years. We believe the low levels of inflation reflect the presence of more slack in the economy than is generally appreciated and inflation is expected to remain subdued. We continue to think the PBoC would prefer to use alternative mean of policy support than via broader rate cuts but may have no choice if the downside risks continue to play out. Yields are close to historic lows, and we expect them to remain there. Elsewhere, inflation appears to have become somewhat stubborn in some quarters, although economic lead indicators generally continue to reflect a more positive outlook. Brazil’s central bank is likely to continue easing policy with other central banks following. However, Turkey’s central bank is expected to wait until there has been a notable improvement in the level and outlook for inflation.
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Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, contact your financial professional or visit BNY Mellon Investment Management – Global Home – English. Read the prospectus carefully before investing. Past performance is no guarantee of future results. Risks Bonds are subject to interest-rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. High yield bonds involve increased credit and liquidity risk than higher-rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis. The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid, and difficult to value and there is the risk that changes in the value of a derivative held by the portfolio will not correlate with the underlying instruments or the portfolio’s other investments. The Bloomberg Global Aggregate Index (Unhedged) is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest directly in any index. Inflation is the rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier. Gross domestic product (GDP) is a monetary measure of the market value of all goods and services produced in a given period of time. The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. Mortgage-backed securities (MBS) are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them. Investors in mortgage-backed securities receive periodic payments similar to bond coupon payments. Option Adjusted Spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Investment advisory services in North America are provided by Insight North America LLC, a registered investment adviser and regulated by the U.S. Securities and Exchange Commission (SEC). Insight North America LLC is associated with other global investment managers that also (individually and collectively) use the corporate brand Insight Investment and may be referred to as “Insight” or “Insight Investment.” Insight is a subsidiary of The Bank of New York Mellon Corporation. BNY Mellon Investment Adviser, Inc., Insight North America, LLC (the fund’s sub-adviser) and BNY Mellon Securities Corporation are companies of BNY. BNY, BNY Mellon and Bank of New York Mellon are the corporate brands of The Bank of New York Mellon Corporation and may be used to reference the corporation as a whole and/or its various subsidiaries generally. © 2024 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286. |
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