Development of US dollar and bonds
Accurate exchange rate forecasts are notoriously difficult, especially for relatively short periods (i.e. 12 to 24 months), due to a variety of influencing factors. Fundamentally, the positive interest rate differential between the US dollar and the euro continues to support the US dollar, both in terms of nominal and real interest rates. From a technical perspective, there are indications which would be supportive for the US dollar. In addition, a weakening of the global economy has tended to be dollar-positive in the past and this is where we are probably heading (a weakening does not necessarily mean a recession, though).
Little change in interest rate differentials expected
Assuming the most likely interest rate cut scenarios for the European Central Bank (ECB) and the US Central Bank (Fed), little will change in this respect over the next six to twelve months. In nominal terms, the yield level in the US will probably remain above that of the eurozone for the foreseeable future. At the same time, however, this is also likely to be necessary in order to attract enough capital to cover the US government's immense and rapidly growing capital requirements. At the same time, the US trade balance remains clearly negative and therefore requires capital inflows from abroad. However, neither the trade deficit nor the high budget deficit in the US are currently an issue for the market. This will almost inevitably change one day, but probably not in the next few years, unless the budget deficits continue to widen massively.
Forecast for interest rate cuts by the Fed
In recent months, the US bond markets have again priced in interest rate cuts by the Fed, starting in September with 25 or 50 basis points (bp) and then effectively a 25 bp rate cut for every Fed meeting until mid-2025. This seems fairly plausible and should bring US interest rates to a neutral level (from the current restrictive level). However, the bond markets have already anticipated a large part of these interest rate cuts, especially for medium and long maturities. Yields could of course fall a little further in the course of the interest rate cuts. However, the potential seems manageable.
The fund's management expects that the currently still inverted yield curve (higher yields for short maturities than for longer ones) will normalize in the course of this process and that short-term US yields will decline from currently around 4% to around 3%, which in turn means slightly rising bond prices on the short end.
What do these forecasts mean for the Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rent, our short-dated US dollar bond fund?
Rising bond prices plus the interest income would result in a positive investment outlook for the fund Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rentover the next 12 to 18 months, with the caveat that major US dollar movements could both significantly boost or erase these investment returns.
Overall, while not an ideal time to invest in the fund (which was probably in 2023), now seems still a sufficiently good spot, with additional earnings potential if interest rates are extended beyond what is currently expected. There is, of course, no guarantee that an investment in the fund will perform well or as expected within the planned investment horizon.
For whom can our dollar bond fund be interesting?
The Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rent is primarily aimed at investors, who
want to invest in bonds, issued in dollar currencies (almost exclusively in US dollar),
favour short-dated bonds and a broad diversification across various issuers of high credit worthiness, and
are looking for an investment in which the bond issuers are selected by applying strict sustainability criteria.
Fund profile
The fund Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rent invests in primarily short-dated bonds in dollar currencies (US dollars, Canadian dollars, Australian dollars, and New Zealand dollars).
The ESG metrics calculated by Raiffeisen KAG and negative criteria are applied. Government issuers that are excluded due to the sustainability criteria can be replaced with issuers such as highly rated supranational organisations (e.g. international development banks), European government financing agencies, and certain public sector entities (e.g. individual Canadian provinces).
Issuers that are not located in the USA, Canada, Australia, or New Zealand also issue bonds in dollar currencies, including the Kreditanstalt für Wiederaufbau and the European Investment Bank. The same can be said for many internationally active companies.
When it comes to the selection of the bonds and issuers, Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rent follows the same proven sustainability investment process of Raiffeisen KAG, which is also used in other Raiffeisen sustainable funds. The bond portfolio constructed in this way will continue to be actively managed by the investment specialists at Raiffeisen KAG with regard to the currencies, duration, and yield curves as well as with regard to the ratings and spreads of the corporate bonds in the fund portfolio.
The Fund Regulations of the fund Raiffeisen-Nachhaltigkeit-Dollar-ShortTerm-Rent have been approved by the FMA. The fund may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: United States.