October, 2023
October saw a continuation of the steep bond sell-off from September, with Australian 10-year bond yields 0.44% higher and US 10-year bond yields 0.36% higher to both finish the month at 4.93%. Australian 3-year bond yields were also 0.32% higher with the yield curves steepening as investors priced in more term premiums to compensate for heightened risk as well as expected additional Treasury bond supply from the US. In light of these yield moves, the Bloomberg AusBond Treasury 0+ index generated a negative 1.85% return over the month. Credit markets also underperformed, with the Bloomberg AusBond Credit 0+ index generating a negative 0.78%. The fund underperformed over the month by 0.12%, driven by the overweight duration position held in the fund. At the end of October, the portfolio duration was 3.09 years, which was 0.67 years above benchmark.
The beginning of October was marred by geopolitical events in the Middle East with the Hamas invasion of Israel, which led to a riskoff move in markets, and as a result, investors sought safety in bonds. Australian 10-year bond yields initially fell 0.20% off the back of the risk-off move, however, this faded relatively quickly with market participants embracing the higher for the longer regime and revising the neutral rate higher which led to longerdated yields increasing more than shorter-dated yields. The Reserve Bank of Australia (RBA) again left cash rates unchanged at 4.10% for the fourth month in a row, with the accompanying statement largely unchanged from the September release, despite a change in Governor, which reiterated a watch and see approach. The bank retained a slightly hawkish bias with "some further tightening of monetary policy may be required" to bring inflation back to the target within a reasonable timeframe with any future change to policy being driven by incoming data and global developments.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-3-2.pdfSeptember, 2023
The big story for September was the significant bond sell-off, which sent rates to multi year highs. Both Australian and US 10- year bond yield ended September around 0.50% higher at 4.50% and 4.57% respectively. Yield curves in both markets steepened with 3-year yields in Australia rising 0.36% to 4.08% and 0.19% for US 2-year yields. Reflecting the move higher in yields, the Australian Treasury 0+ index generated a negative 1.87% return over the month with credit markets performing better with the Australian Credit 0+ index generating a negative return of 0.57%. The fund underperformed over the month by 0.23%, driven by the overweight duration position held in the fund. At the end of September, the portfolio duration was 3.41 years.
Central banks played a key role in the sell-off, as investors started to believe rates would be held higher for longer with any easing cycle pushed out further into 2024. The main catalyst was the US Federal Reserve September meeting. While the cash rate was left unchanged at 5.30%, it was the change in officials cash rate expectations that took the market by surprise. The FOMC raised their median expectations for the cash rate in 2024 by 0.50%, suggesting there would be fewer cuts in policy in 2024. Markets quickly reflected this change with the timing of the first cut pushed out to Q3 2024 from Q2 2024.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-26.pdfAugust, 2023
August was a tale of two halves for the domestic bond market. The month started with a relentless move higher in global yields before stabilizing mid-August and recovering most of the losses into month's end. Intra month both Australian and US 10-year yields reached a cycle high of 4.32% and 4.36% respectively. While there was no single catalyst behind the selloff, the events that generated the most headlines included the US downgrade by Fitch from AAA to AA+, increased focus on the US budget deficit and funding requirements and a growing scepticism that the US Federal Reserve would commence an easing cycle in the second half of 2024. Domestic markets outperformed both US and European markets with the domestic Treasury indices generating a return of 0.60% while the US and European treasuries generated a return of -0.30% respectively. Domestically the interest rate curve steepened 8 basis points over August with 3-year bond yields falling to 3.73% while 10-year bond were largely unchanged at 4.03%. Duration was increased over the month as interest rates touched our targeted levels. At the end of the month, the duration stood at 3.77 years after starting at 3.43 years.
The Reserve Bank of Australia (RBA) held the cash rate steady in August at 4.10% for the second month in a row. The RBA highlighted that rates had been increased by 4% since May 2022 and that "higher rates are working to establish a more sustainable balance between supply and demand in the economy" Overall the statement was slightly dovish with the RBA noting the economy had slowed, inflation had peaked but still too high and employment conditions had eased. The dovish tone laid the foundations for domestic rates to outperform offshore markets as evidence grew that the RBA is extremely close to the end of the tightening cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-7.pdfJuly, 2023
Fixed-income markets were mixed in July as Central banks continued to increase interest rates. Although markets largely believe central banks are close to the end of their tightening cycle, the risk remains to the upside, driven by persistent core inflation. Domestically, rates curves steepened as the three-year rates fell 0.12% to finish at 3.86% while 10-year rates increased by 0.035% to finish at 4.05%. Portfolio interest rate risk was largely unchanged over July, finishing at 3.43 years.
The Reserve Bank of Australia (RBA) held rates steady at 4.10% at the July meeting with guidance remaining unchanged while noting "some further tightening of monetary policy may be required". The Governor reprised the same language used at the April pause, "the decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the economic outlook and associated risks…" Overall the statement was balanced with the bank acknowledging that inflation had passed its peak but was still too high, labour markets were showing some signs of easing, particularly in the leading data such as vacancies and advertisements however unemployment is still at historical lows. Market reaction to the pause was muted with both three- and 10-years bonds rallying 0.04% while two further tightenings were priced over 12 months with September the preferred timing for the next move.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-25.pdfMay, 2023
May was an eventful month for markets with concerns early about further US regional bank issues, further interest rate tightening by the US Federal Reserve, European Central Bank (ECB) and the Reserve Bank of Australia (RBA), negotiations around the US debt ceiling and data that pointed to inflation being stickier than expected. Over the month bond yields pushed higher across the globe. Australian three- and ten-year rates finished 0.37% and 0.25% higher at 3.37% and 3.61% respectively, with similar moves being experienced in the US with the two- and ten-year yields closing the month at 4.40% and 3.65% respectively.
The fund started the month with 2.25 years of interest rate duration before finishing the month with 3.09 years. The month opened with the RBA increasing the cash rate by 0.25% to 3.85% after a brief pause in April, which was contrary to market and most economists' expectations. Forward guidance for further policy tightening was softened but the Board flagged upside risks around services inflation. This led to heightened volatility in bond markets as the short end of the yield curve initially sold off ~20bps on the decision, however, regained those losses a few days later.
Adding to the volatility, there was a fresh round of US regional bank concerns with First Republic Bank being closed and JP Morgan acquiring most of the asset, which was the third regional bank collapse in 2 months. In addition to this, equity prices of several other regional banks in the US fell significantly, driven by concerns about deposit outflows. The key driver of rates for the remainder of the month was headlines around the US debt ceiling which caused nervousness amongst investors and bonds subsequently traded with a bias towards higher yields, led by the US.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-6.pdfApril, 2023
April was a fairly calm month for investment markets compared to the turmoil that surrounded March. Many of the key market volatility measures fell in April, including the US Treasury volatility index (MOVE) falling back to levels seen prior to the Silicon Valley Bank (SVB) collapse. This improved sentiment was also seen in equity volatility, with the VIX index falling to levels not seen since November 2021. Yield movements both locally and in the US reflected the improved trading environment. Australian three- and 10-years bonds traded in a 0.46% and 0.41% range respectively, well down on the March range of 1.06% and 0.84%, finishing the month largely unchanged at 2.98% and 3.34% respectively. While in the US, treasuries followed a similar path with 10 years finishing the month unchanged at 3.45%. The fund started the month with a duration of 1.84 years before reducing its underweight duration position to finish the month at 2.25 years. The Reserve Bank (RBA) delivered the first pause in the tightening cycle, leaving the cash rate at 3.60%.
There was still a tightening bias in the guidance with the board expecting that "some further tightening of policy may well be needed". The bank cited lags in monetary policy, tightening of global financial conditions following the global banking problems, the softening of the monthly inflation print and a substantial slowing in household spending as the key drivers of holding rates steady. Markets had largely anticipated the pause which saw little market reaction.
File:March, 2023
March was a volatile period for global markets, with the key driver being concerns of a contagion in the banking system both in the US and Europe. Given this backdrop, sovereign bond markets were very strong, driven by flight-to-quality trades. Australian 10-year government bond yields fell 0.55% to finish at 3.30% while US 10- year treasury yields fell 0.45% to finish at 3.47%. Particularly notable was the extreme volatility in bond yields with an implied volatility of Treasuries as given by the MOVE index reaching its highest since the Global Financial Crisis (GFC) and some of the largest daily ranges seen in years. Equity markets were more mixed, with the ASX 200 returning -1.11%, however, the S&P500 continued its strong run, returning 3.5% for the month. The fund started the month with 2.87 years of interest rate risk before increasing to 3.40 years in the first few days of the month. The fund took profit on this long-duration position as yields dropped precipitously on the back of global banking concerns. By month end, the fund had reduced its total duration to 1.84 years as, in our view, markets had become overextended.
The Reserve Bank of Australia (RBA) delivered an expected 0.25% cash rate increase, the 10th consecutive rise to official cash rates, to 3.60%. The statement was less hawkish than the previous given the change of narrative from "further increases in interest rates will be needed over the months ahead" to a more open-ended "further tightening of monetary policy will be needed" (no reference to time). Market pricing now suggests interest rates have peaked at 3.60% and will start to fall from here, with an implied cash rate of 3.25% in 12 months' time. Economic data locally continued to print relatively strongly with unemployment back to cycle lows at 3.5%, robust retail sales and Gross Domestic Product (GDP) data, and also inflation that is well above target, although the strength of the data took a back seat to the banking fears offshore.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-24.pdfFebruary, 2023
After a positive start to 2023, most risk markets reversed in February. Globally, bonds had a poor month with Australian Government 3- and 10-year yields rising 0.42% and 0.35% respectively to finish at 3.60% and 3.85%. This move led to the Australian Treasury index giving back over half its January gains to be down -1.63%, while US Treasuries were down -2.41%. Investors ramped up expectations of monetary tightening throughout February as pessimism grew about inflation. By the end of the month, the US market had removed the expectation of monetary easing in Q4 2023, leading to the terminal cash rate of 5.40% from 4.60%.
This was a similar situation in the domestic market with the terminal cash rate moving from 3.78% to 4.31% by December 2023. The fund started the month with a short-duration position of 1.92 years before closing that position early in the second half of the month, adding value for the fund. By the end of the month, the fund held 2.87 years of duration, modestly long versus the benchmark.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-23.pdfJanuary, 2023
January was a strong start for global markets with investors buoyed by several good news stories. A decline in gas prices of 24% saw several economists remove a European recession from their outlooks. The continued reopening of China meant investor sentiment turned positive on the Chinese economic outlook, but residual concerns did surface about the inflationary impact on the global economy. The ASX 200 returned 6.22% while the S&P500 had its strongest start since 2019 returning 6.3%. Sovereign bond markets were equally as strong with Australian 10-year Treasury yields falling 0.54% to finish at 3.32% with the Treasury index generating 2.93%, while United States (US) treasuries fell 0.37% to finish at 3.50%. With markets continuing to range trade over January the fund's duration largely reflected these moves.
The fund started the month with 2.38 years of interest rate risk before being increasing to 3.70 years by the middle of the month. As yields pushed higher in the final week of January, we took the opportunity to reintroduce our underweight position. At the end of January, the fund held 1.90 years of interest rate risk. With the Reserve Bank of Australia (RBA) not meeting in January, attention turned to the data that would set the screen for the February meeting.
The release of a weaker-than-expected employment figure pushed rates to their intra-month low with the three-year bond falling to 2.97%. Full-time employment disappointed markets by printing negative 12,000, well below the consensus of plus 22,000, leading to a small uptick in the unemployment rate to 3.5% from 3.4%. The move lower in rates was short-lived following the release of the much-anticipated inflation report. Inflation surprised to the upside with headline at 8.4% Year on Year (YoY), well above expectations of 7.7%. Inflation momentum continued to build domestically in Q4 with 75% of the basket annualizing above the top of the RBA's band. Of greater concern was the increase reflected domestically driven inflationary pressures which are more relevant for the RBA's policy setting.
The higher inflation number pushed against some speculation that the RBA could pause at their February meeting and instead locking in a further 0.25% hike and a terminal cash rate of 3.75% by July 2023. Much of the strength in global bond markets was driven by softer economic data in the US and the growing speculation that the Federal Reserve (Fed) might be nearing the end of the tightening cycle. This view accelerated with the release of weak ISM services and manufacturing indices which fell into contractionary territory at 49.6 and 48.4 respectively and soft retail sales and industrial production numbers. US inflation data further supported the market's view that we were past the peak inflation. Core inflation (excluding food and energy) gained 0.3% in December putting the annual rate at 5.7%, well below the peak of 6.6% in September 2022. While trending in the right direction, services sector inflation remains persistent.
Shelter costs remain a significant contributor although evidence in hand from the Zillow index indicates that new rents have peaked. Overall, the theme was that goods inflation is solved but services inflation will evolve over 2023. By the end of the month, the market expected the US Fed funds rate to reach 4.9% by July before falling to 4.40% by the end of 2023. This was in stark contrast to the Federal Reserve forecasts of a cash rate of 5.25% and no rate cuts expected until 2024.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-22.pdfDecember, 2022
2022 will go down in living history as one of the worst years for global bond markets. With inflation hitting multi-decade highs and central banks embarking on the most aggressive tightening cycle in generations bond yields moved aggressively higher. After Australian three- and 10-year bond started the year at 0.91% and 1.67% they rose to finish at 3.50% and 4.05% respectively. This led to negative absolute returns in the three-to-five-year and sevento-10-year Treasury index of -5.6% and -14.36%. In the United States (US), the Treasury index fell -12.5%, its worst annual result since 1973.
Deutsche Bank reported that US 10-year Treasuries had their worst year on a total return basis since 1788. Sovereign returns in Europe and UK were even worse, with the European sovereign index down -18.4% while UK gilts were down a whopping -25% amidst the political turmoil. The month of December reflected the previous 11 months with markets remaining heavily focused on inflation, central banks tightening cycles and how the economy would respond in 2023.
As expected, the key events in December included the release of the US Consumer Price Index (CPI), the US Federal Reserve and Reserve Bank of Australia (RBA) monetary policy decisions and the local employment and gross domestic product (GDP) releases. Locally three- and 10-year bonds rose 0.33% and 0.52% respectively to finish at 3.50% and 4.05%. The portfolio entered December with 2.24 years of interest rate risk before being reduced to 1.92 years. This position was maintained throughout the month before being closed out in the last days of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-21.pdfNovember, 2023
As with the majority of 2022, markets remained squarely focused on inflation data and Central bank commentary. While volatility was lower than in previous months it remained above historical norms, with domestic three- and 10-year trading in a 0.50% and 0.62% range, respectively. Bonds were able to produce a solid return in November driven by downside surprises in the United States (US) and European inflation and speculation that Central banks are moving to a slower pace of tightening. Domestically three- and 10-year bonds finished 0.21% and 0.24% lower to finish at 3.13% and 3.52% respectively. While US 10-year bonds finished November 0.40% lower at 3.64%.
After starting the month with 2.97 years of interest rate duration the fund moved from overweight to underweight position to finish the month at 2.24 years. In terms of the interest rate drivers over the month, the US Consumer Price Index (CPI) miss was the biggest surprise. Markets expected core inflation to rise by 0.50% over the month, instead of only rising by 0.30%. In year-end terms, headline inflation fell to 7.7% from a peak of 9.1% in June. The miss reflected broader evidence that US inflation may have peaked with a deceleration in prices becoming more evident. Of note was the moderation in rents, a dramatic fall in health insurance costs and a broadening in declines of core products. That said, overall price pressures remained firm. The CPI release led investors to price in a growing chance that the US Federal Reserve would slow the pace of its tightening cycle at the December meeting.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-20.pdfOctober, 2022
October proved to be a strong month for financial markets after a terrible third quarter. The key behind the recovery was the speculation that Central banks were starting to step down the size of their tightening moves following a period of aggressive action. The improvement in global asset markets was also supported by a significant fall in the European natural gas price and a stabilization in the UK market following the arrival of a new government. Equities were a standout over the month with the ASX 200 up 3.4%, the S&P 500 up 8.1% and European markets up between 5% to 9%. Globally, bond market performance was mixed with Australian three and 10-year bond closing the month 0.28% and 0.13% lower at 3.39% and 3.79% respectively, while US two- and 10-year yields closed higher at 4.49% and 4.05%, both 0.22% higher over the month. Once again, the size of the monthly change masked the continued volatility in markets with the Australian 10 year having a 0.68% range while the US 10-year range was 0.78%. The portfolio started the month with interest rate duration of 3.25 years, before taking advantage of the rally in yields, to lower duration to 2.60 years, in the first week of October. Duration remained largely unchanged until the last week of the month. With a large move higher in yields the portfolio duration was increased to around 3 years, which is where it closed out the month. Two things dominated the markets' attention in October, Central bank commentary and action and inflation data. The month opened on the back of hopes that the US Federal Reserve and other central banks might start to slow the pace of tightening after the turmoil that closed out September. That narrative got further support when the RBA surprised the market by deciding to tighten by 0.25% instead of the expected 0.50%, taking the cash rate to 2.6%. The Governor had warned of the possible change at the Anika Foundation speech and the minutes from the September meeting confirmed that the board had considered two options for the size of the September rate move. The RBA was clear to acknowledge both the magnitude and pace of tightening over recent months but confirmed further tightening would "likely be required over the period ahead." The other narrative that was evident, was that policy works with a lag and it's too early to determine the impact of higher mortgage rates on the household sector.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-19.pdfSeptember, 2022
September rounded out a quarter of extreme volatility with declines experienced across the majority of major asset markets. Multiple events were responsible for market declines including higher than expected inflation in the US, massive energy shock in Europe, very hawkish central bank commentary and the UK governments mini-budget in late September. Domestically, threeyear bonds traded between 3.07% and 3.93% while 10 years bonds traded between 3.51% and 4.18% before finishing at 3.67% and 3.92% respectively. US bonds underperformed the local market with 10 years bonds finishing 0.65% higher at 3.83%. Portfolio duration started the month at 3.87 years before being reduced to 2.60 years towards the middle of September. As markets recommenced the push higher in yield, we gradually reintroduced duration to finish the month at 3.40 years.
In many respects, what alarmed markets most over September were how central banks become more explicit about how far there were willing to take policy into restrictive territory, even as signs of slowing growth emerged. This was particularly the case with the US Federal Reserve following through on its hawkish rhetoric to deliver a third 0.75% tightening, taking the cash rate to 3.25%. Furthermore, the median dots (Fed rate expectations) favored a further 1.25% in 2022 and a cash rate of 4.6% by the end of 2023, even with forecasts of unemployment raising to 4.4% from 3.8%. This was a similar story across most central banks. The ECB commenced there tightening cycling in July with markets expecting a 0.25% hike, however with inflation rising they delivered a 0.50% in July following it up with an even larger 0.75% hike in September. Other notable policy moves included a 1% hike by the Riksbank, 0.50% by Bank of Canada, 0.75% by the Swiss National Bank and 0.50% by the Bank of England.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-18.pdfJuly, 2022
Concerns about growth slowing and some signs that inflation might have peaked saw markets begin to price less aggressive policy tightening by central banks in the second half of July. To demonstrate the extent of the move, US markets began to price rate cuts within the next six months while locally markets took the 12-month forward cash rate pricing from 3.70% to 3.17%. Across the board, bond rates fell dramatically with Australian three-year and ten-year bonds falling 0.46% and 0.60%, respectively to close the month at 2.66% and 3.06%. US and German 10-year rates fell 0.35% and 0.51% to finish the month at 2.65% and 0.81% respectively. After starting the month with duration of 2.80 years, we progressively added duration early in July before finishing the month with 3.34 years of duration. This meant the funds performance strongly benefited from the large rally in rates over July.
The RBA hiked cash rates by 0.50% in July for the second consecutive meeting to 1.35%. The move was fully priced by the market with little market reaction. The concluding paragraphmaintained guidance that "the board expects to take further steps of normalizing over the months ahead" and described the tightening as "a further step in the withdrawal of the extraordinary monetary support". High inflation and the historically low level of interest rates remained the motivation for the larger than standard interest rate hike. Late in the month saw the key release of the quarter two CPI. The headline CPI lifted by 1.8% over the quarter with cost pressures being broad based. On an annual basis inflation lifted to 6.1%, its highest level since 1990. Even the RBA's preferred measure of trimmed inflation pushed to 4.9% p.a. The release saw the CPI above the RBA's target band of 2%-3% for the fifth quarter. The increase added weight to a 0.50% hike at the August meeting, which was subsequently delivered on the 2nd of August.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-17.pdfJune, 2022
Risk off sentiment remained the overriding theme throughout June with all asset markets experiencing various levels of negative returns. Developed market equity returns ranged from -3% to - 14% with the ASX 200 falling -8.9% while the AUD treasury index bonds were down -1.319% after being down -4.5% around the middle of the month. Even commodities markets have struggled after a strong start to the year with WTI falling 7.8%, posting the first monthly decline in 2022. After starting the month with 2.41 years of interest rate duration we progressively unwound the position to end the month at 2.80 years.
The main reason for the broad-based declines is the fact that recession risks have ramped up significantly over June. There are a number of reasons for the change in sentiment. The first being inflation has been far more persistent than central banks and markets have expected, thus leading to a more aggressive pace of tightening from central banks globally. As an example, the 12- month forward cash rate moved from 2.50% to 3.75% over the March quarter. This was after starting the year at just 0.90%. This was a common pattern across all developed markets with the effect of higher rates now starting to show up in real economic data.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-16.pdfMay, 2022
Despite the markets rallying the majority of May, the sharp selloff in the first week meant local markets ended in negative territory. The biggest market shift in May was the changing narrative from inflation risk to growth risk, as investors grappled with the monetary policy tightening and the impact on the growth outlook. The zero Covid-19 strategy in China, war in Ukraine and a string of weak US data, in particular softer housing data, added to global growth fears. Over May, three-year yields and 10-year yields rose 0.13% and 0.23% to close at 2.84% and 3.35% respectively. This was a significant underperformance to the US markets which saw bond yields eke out a small rally over the month, with two-year yields and 10-year yields falling 0.08% and 0.03% to finish at 2.55% and 2.84%. Portfolio interest rate duration was reduced over the month to 2.41 years after starting the month at 3.32 years. Locally, pricing of monetary policy expectations started to drift away from the global peers with the market increasing the 12- month forward expectation of cash rates to 3.35% from 3.18%. This contrasted with US pricing with May being the first time in 10 months that the Fed fund futures had downgraded the implied rate by the December 2022 meeting to 2.74%, 0.12% lower.
Furthermore, speculation about a potential 0.75% rate hike in the US cash rate was removed following the Fed Chair Powell strongly signaling two further 0.50% hikes at the June and July meetings.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-15.pdfApril, 2022
There was little reprieve for asset markets in April as concerns about global growth gave way to the continuous repricing of Central Bank expectations, and inflation numbers printing well above expectation. For only the second time in the 21st century markets experienced a negative return in both global equity and bond markets. In the US the S&P fell more than 5% and US Treasuries lost more than 2% while locally the ASX200 was down around -1% and treasuries -1.50%. The losses were driven by multiple factors including the ongoing Russian invasion of Ukraine and the risk of further escalation, the China COVID-19 lockdowns and growing concerns that central banks won't be able to deliver a soft landing as they battle heightened inflation. By the end of the month domestic three- and 10-year yields had risen 0.38% to 2.715% and 0.30% to 3.17% respectively. Portfolio duration finished the month at 3.32 years after starting the month at 2.02 years.
The growing inflationary pressure theme remained the dominant driver of rates throughout April as it has been for several months. In the Euro Area, CPI rose to a record high of 7.5%, the highest level since the single currency was formed. In the US, the March inflation reading rose to a forty year high of 8.5%, with core inflation rising 6.5%. It was the same outcome for Australia, with inflation printing at 5.1% y/y with the trimmed mean, the RBA's preferred measure, printing at 3.7% y/y. This continued inflation placed significant pressure on central banks, with the markets increasing their expectations for future monetary policy tightening throughout April.
Locally the market brought forward the timing of the first tightening of monetary policy with 0.15% priced for May and increased 12-month cash expectation to 3.18% from 2.41%. Subsequently, the first tightening fell short with 0.25% delivered at the May meeting. This theme was replicated in the US and Euro markets with a further 0.47% and 0.32% of tightening added to expectations over the end of 2022. All in all, April moves added to 12-month treasury losses with the domesti
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-14.pdfMarch, 2022
Bond yields rose aggressively throughout March as inflationary pressure gathered momentum and fears grew that inflation would become embedded in expectations. The ongoing war and broadening sanctions on Russia left commodity prices under pressure, while globally, central banks' communication was increasingly hawkish. Three- and 10-year yields rose 0.87% and 0.94% respectively to finish at 2.56% and 2.85%. The 10-year point significantly underperformed the US markets with US 10yrs rising 0.42% to close the month at 2.33%. Duration ended the month at 2.02 years after starting the month at 2.46 years.
The US Federal Reserve commenced its tightening cycle by rising rates by 0.25%, but it was the hawkish commentary that followed that caught the markets attention. At the press conference post the increase, Chairman Powell noted that "ongoing increases in the federal funds rate will be appropriate"... "every meeting is live" and would move more quickly if required. As we moved through the month, the rhetoric from Federal Reserve members reflected growing inflationary concerns. A speech by Chairman Powell on March 21 highlighted these inflationary concerns. Powell noted that "the upward pressure from the invasion of Ukraine on inflation from energy, food and other commodities comes at a time of already too high inflation" and "the risk is rising that an extended period of high inflation could push longer term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously". This was followed up by Federal Reserve member Bullard stating, "he wanted the Fed to move aggressively on rates and a 50-basis point move should be in the mix".
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-13.pdfFebruary, 2022
February was a tale of two halves. The first was dominated by strong economic data, higher inflation, and hawkish central bank commentary, prompting concerns of more aggressive tightening cycles. The increase in yield quickly halted in the second half as warnings and the eventual invasion of Ukraine resulted in a significant increase in market volatility and a safe haven bid for US treasuries which flowed through to domestic yields. By the end of the month, domestic three and ten-year yields where 0.21% and 0.40% higher, at 1.62% and 2.19% after reaching a high of 1.80% and 2.33% respectively prior to the conflict. Portfolio duration started the month at 1.62 years before finishing the month at 2.46 years.
The conflict's implications went beyond the direct impact on Russia. Numerous commodities surged on the invasion news. Oil was a notable example, with Brent Oil moving above $100 a barrel, the first time since 2014. Numerous other commodities experienced double digit percentage increases with European gas up 16.4%, LNG up 13%, wheat up 21.9% and aluminum up 11%. The rise in commodity prices is set to make central bank lives more difficult as supply shocks lead to further inflation pressure and lower growth. The main concern for central banks is that inflation becomes entrenched resulting in a stronger policy response.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-12.pdfJanuary, 2022
The big theme over January was the hawkish pivot by several central banks in response to increasing inflationary pressures. The US Federal Reserve (FED) was at the forefront with investors rapidly bringing forward rate hike expectations. Over January the US market went from pricing in three hikes over the coming 12 months to five. Further to this a number of participants started to speculate the first-rate move would be 0.50% compared to consensus of 0.25%. The domestic market took its lead from global movements with three and ten-year yields jumping 0.40% and 0.22% respectively to finish the month at 1. 31% and 1.90%.The fund started the month with 2.77 years of interest rate duration before closing out the month at 1.62 years.
With no Reserve Bank of Australia (RBA) meeting in January markets began to speculate that the RBA would follow the Federal Reserve by signalling the commencement of a tightening cycle earlier than expected. This was reflected through the steepening of the implied cash rate curve which saw 12-month expectations move from 0.80% to 1.15%. The aggressive market adjustment was highlighted when the release of the very high inflation print only resulted in a small repricing of cash rate expectations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-11.pdfDecember, 2021
A mixed month for global rates with domestic yields largely unchanged while the short end of the US curve continued to push higher as the market increased the likelihood and size of interest rate moves in 2022. Over the month the domestic 3-year yields drifted 0.04% higher to 0.91% while 10-year yields closed 0.02% lower at 1.67%, the US 2-year and 10-year rate increased 0.15% to 0.73% and 0.05% to 1.51% respectively. We started the month with duration of 3.67 years before unwinding this position around the middle of the month. We finished the month with 2.77 years of interest rate durations with a steepening curve bias. No surprises from the RBA at its last board meeting for the year with settings unchanged and no hints at any possible shifts to quantitative easing (QE) or taper. Overall, comments were a bit more hawkish. GDP was forecast to remain strong as the Omicron variant was noted as a "new source of uncertainty" but "not expected to derail the recovery" and the economy was expected "to return to its pre-delta path in the first half of 2022. Adding to the more hawkish tone was the reference to "Leading indicators point to a strong recovery in labour markets" and a "further pick up in wages growth is expected as the labour market tightens". Wages have been noted previously by the RBA as a key for higher inflation. With its next meeting on 1 February, the RBA has the luxury of time to observe the economy, Omicron developments and the actions of other central banks in the next couple of months.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-10.pdfNovember, 2021
Another volatile month for bond markets as investors worked though changing central bank commentaries, economic data and the appearance of the new COVID-19 variant "Omicron". Locally, three-year bonds traded in a range of 0.99% to 1.33% before finishing at 1.01%, 0.39% lower over the month. 10-year bonds closed at 1.70%, 0.415% lower, after trading between 1.66% and 2.02%. Australian rates outperformed US markets with US 10- years only closing 0.10% lower at 1.45%. The Fund maintained a long duration position over November, however the large deterioration in the swap and credit spreads swamped the overall Fund performance. At the end of the month the Fund duration was 3.67 years.
After much speculation in the second half of October, the RBA confirmed the end of its Yield Curve Control (YCC) program at its November meeting. This was the next step in the normalization of monetary policy which began with the ending of the Term Fund Facility (TFF) on June 30. The RBA however remained resolute that interest rates would not be increased before late 2023, in stark contrast to market pricing which had close to four tightening's priced before the end of December 2022. This disconnect between the RBA view and the market is adding to the increased volatility experienced over the past six weeks.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-5.pdfOctober, 2021
Bond markets experienced one of the most significant selloffs in recent memory. Locally, most of the damage occurred in the 3 and 5-years part of the curve with rates lifting by 0.90%, and 3-year yields finishing at 1.40%. Overnight indexed swaps moved rapidly to price a tightening of cash rates with the market pricing the first tightening for April 2022, some two years ahead of RBA guidance. Further to this the market had priced four tightening's of cash rates by the end of 2022. The long end of the curve was not immune to these moves with the 10-year rate rising 0.61% to finish at 2.115%.
We entered the month with a short duration exposure and gradually reduced this position throughout the month. With the aggressive pricing of rate hikes in the final week we added front end duration, finishing the month at 3.67 years. Inflation was the talking point of markets during October. In the US, monthly data added to the story that inflation may not be transitory. Rising business activity and new orders rose while supply chain pressures remained high. Headline inflation and retail sale printed on the higher side of expectations. Markets responded by pushing 10-year US breakeven inflation levels to a record high of 2.70%. Locally, inflation surprised on the high side with the trimmed mean CPI, the RBA's preferred measure, printing at 0.70% for Q32021 leading to an annual rate of 2.10%. This was the first time in several years' inflation had moved into the RBA target band. The release drove front end rates higher and had many in the market questioning whether the RBA would stand by its Yield Curve Control strategy, with the April 2024 bond moving from 0.175%, RBA target rate of 0.10%, to over 0.70%. By October 28 the yield curve had flattened 0.50% over the month, a move only exceeded in June 2009.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-4.pdfSeptember, 2021
Local bond markets started to look past the uncertainty of lockdown in September as vaccination numbers grew and markets began factoring in a more optimist outlook. This was particularly the case in the final week as 10 year bonds rose 0.22% to finish at 1.49%; 0.33% higher over the month. The move higher was sparked by a more hawkish tilt to the US Federal Reserve's Federal Open Market Committee (FOMC) statement and Chairman Powell's press conference, resulting in US 10 year rates pushing 0.18% in the final week to finish at 1.49%. The Fund held a short interest rate position to benchmark over the month, driving the strong outperformance, with duration largely unchanged at 1.49 years. As expected, the US Federal Reserve confirmed that a November taper announcement was likely, but it was the somewhat quicker timeline of the QE taper reduction, concluding around the middle of 2022 that surprised the market. A quicker timeline opened up the optionality for rate hikes by the end of 2022 should the conditions warrant. The other driver of the markets hawkish interpretation of the statement was that inflation was expected to remain elevated for a longer period, with Chairman Powell noting that "more persistent than expected bottlenecks relative to their forecast update in June". The combination of these three factors saw rates push higher, indirectly impacting local interest rate markets
The portfolio is positioned for further upward recalibration to interest rates. We are looking to profit from a lift in Australian 10 year government bond yields to around 1.9% by year end, and US 10 year yield to around 1.8% by retaining an underweight in longer
Semi-government spread performed strongly in September after several months being impacted by the economic uncertainty of COVID-19 and increasing budget pressure. Two separate events had a positive impact. Firstly, the regulator announced the phasing out of the Committed Liquidity Facility (CLF). This facility was used by banks as part of regulatory liquidity calculations. Banks are expected to replace this facility with semi-government holdings, leading to increased demand over the medium term. The other story was the sale announcement of Westconnex by the NSW Government for $11bn which would be used to retire the equivalent amount of debt over the next two years. Overall performance was relatively uniform, but NSW did perform slightly better
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-3-1.pdfAugust, 2021
Locally, interest rate markets were largely unchanged over August with the lockdowns of NSW and VIC having a dampening effect on market sentiment and rendering most economic data obsolete. The Australian 10-year bond traded in a range of 1.05% to 1.24%, finishing the month at 1.14%, 3 basis points below the opening yield. While 3-year bonds ended the month 3 basis points lower at 0.26%. Portfolio duration was reduced to 1.83 years during the last week of August as we became more convinced interest rates would drift higher into year end.
The RBA surprised many at its August meeting by leaving its planned September QE plans unchanged. As COVID-19 numbers grew and it became more evident lockdowns would be extended, many expected the RBA to delay the announced bond purchase reduction, instead the RBA remained upbeat about the domestic outlook, expecting it to grow strongly again in 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-3.pdfJuly, 2021
Bonds rallied from the beginning of July, with the increasing spread of the Delta variant weighing heavily on global sentiment. Domestic yields outperformed movements in the US with the 10- year falling 0.36% to finish the month at 1.175% while the US 10- year fell 0.25% to 1.22%. After starting the month with 1.88 years, the short duration was neutralized early in the month to finish at 3.10 years.
The lockdowns in Australia drove the outperformance of the domestic market and had many market participants speculating whether the RBA would delay the taper of the QE program that was announced at their July meeting. This speculation saw 3-year yields drop 0.17% to 0.24%. As the Sydney lockdown continued through the month strong domestic data was largely ignored as little of it reflects activity in Sydney after the lockdown.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-2.pdfJune, 2021
The key themes over June were the significant flattening of both the domestic and US curves and the reduced fear of market concerns about inflation risk. The domestic curve started the month at 1.43% and fell to 1.07%. Three year rates rose 0.25% to 0.465% following a significant change in the market's expectations that the Reserve Bank will commence tightening rates as early as 2022, while 10 year rates fell 0.11% to 1.47% driven by reduced inflationary fears in both the US and domestic economy. The flattening of the curve was a key driver for the Fund's underperformance with our expectations that inflationary pressures will grow with improved economic data and employment numbers. At the end of the month, the Fund maintained its short duration position of 1.77 years.
US inflation data and expectations continued to surprise on the upside but was offset by a poor employment report. While inflation data was high, markets become more comfortable with the Fed's view that inflationary pressures were only transitory. The US Federal Open Market Committee (FOMC) surprised markets with the Fed dots implying two rate hikes in 2023 while inflation forecasts were only 2.20%, well under market expectations. Immediately post this meeting, long end rates pushed lower while short rates rose
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-5.pdfApril, 2021
After a volatile first quarter for global interest rate markets, yields spent April range bound. Domestic 10-year bonds started April at 1.80% before finishing the month at 1.70% while US 10-year rates ended the month at 1.63%, falling 0.11%. The small rally in yields globally largely reflected a level of fatigue following the strong rise in yields since late 2020 and a market that is well priced for the current strong rebound in US data. The Fund's duration was largely unchanged over the month after starting at 4.19 years before finishing the month at 4.06 years.
Domestically economic data was mixed with business and consumer confidence rebounding strongly as the economy continued to open. The unemployment rate fell to 5.6% from 5.8% with a solid jobs improvement of 70,000 new jobs created. However, inflation printed well below expectations at 0.6% for the first quarter of 2021, leading to just 1.1% over the year, well below the RBA's 2-3% target. The US data prints reflected the strong rebound currently occurring. The high levels of fiscal spending, solid vaccine uptake and the reopening of the economy has seen consumer confidence grow strongly which has supported retail spending and housing. Like Australia, job growth in the US was strong, with the creation of 915,000 new jobs in March.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1-1.pdfDecember, 2020
Front end yields remained unchanged over December with 3-year bonds closing the year at 0.10%. Ten-year yields moved higher, finishing 7 basis points higher 0.97%. While COVID-19 infection numbers weighed heavily on global growth expectations on the rollout of the vaccine, an additional US stimulus package and positive domestic data all placed upward pressure on long dated yields. Over December the fund returned -0.25% while over 12 months it returned 2.31%. As expected, the RBA's December board meeting was uneventful.
The statement suggested the Bank remains open to further quantitative easing (QE) while negative rates and further yield curve control seem unlikely. The RBA made it clear that their balance sheet wouldn't drift too far from global peer action, meaning any further global QE action could result in further domestic QE. The December RBA board minutes contained few surprises. Of note was the boards comment that they would closely monitor the effect of the QE program on the economy as well as the functioning of the market and were prepared to do more if required as the size of the QE program remains "under review". The Australian government released its mid-year budget update. Australia's deficit for FY2021 was revised lower to $197bn from $214bn.
The improvement is owed mostly to the JobKeeper program, with strong economic growth and fewer recipients. On the economic front, Q3 GDP came in on the stronger side with a quarter on quarter jump of 3.3%. With Victoria coming out of lockdown during this period it leaves more pickup ahead in the coming quarters. November employment was strong at 90k, well above expectation. Victoria again drove much of the improvement. Finally, unsurprisingly retail sales jumped a remarkable 7% month on month, again reflecting Victoria. Excluding Victoria, the number was still a solid 2.7% gain. Turning to the offshore markets, US ten-year bonds moved higher finishing the year at 0.92% from 0.84%.
The US Federal reserve (Fed) did little to change its monetary policy stance in December. The most notable development was how they described the outlook for their asset purchase program. Noting they would continue until there had been "substantial further progress" on the inflation and employment front. Congress also passed a $900bn stimulus package which the market expected, and the UK finally struck a Brexit deal with Europe. December was a mixed month for local credit markets with strong support for high yielding BBB rated corporates and widening pressure on local bank spreads. The strong theme from previous months continued with investors searching for yielding product, driving BBB spreads 7 basis points tighter to finish the year at 1.07%. While three- and five-year domestic bank paper struggled to hold onto recent lows, with spreads widening 3 basis points respectively to 0.20% and 0.36%. Issuance was extremely light in December with only three notable transactions.
Goodman Industrial Partnership issued an 8-year bond at credit margin of 1.15%. Like the majority of transaction in the second half of 2020 the deal was well oversubscribed and priced 15 basis points tighter than the announced price. Macquarie Bank issued a five-year bond at a margin of 0.48%. Finally, SHML launched its first RMBS transaction for 2020. As a premium issuer, interest was extremely high with the transaction 3.5 times oversubscribed. The fund participated in the Macquarie and SMHL transactions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-1.pdfticker: AUS0071AU
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https://www.altiusam.com/funds/altius-sustainable-bond-fund
Fund Update
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Altius Sustainable Bond Fund aims to outperform the benchmark (50% Reserve Bank of Australia Cash Rate and 50% Bloomberg Ausbond Composite 0 Year Index) after fees over rolling three-year periods. Altius employs an active and diversified strategy that aims to capture the upside of the bond market, while avoiding returns less than cash in a rising rate or deteriorating credit environment. High conviction and high quality trades are used to exploit the mis-pricing of bonds at all stages of the economic cycle. An ethical overlay is used to ensure security issuers involved in certain activities identified by the Fund’s Sustainability Policy are not considered for inclusion in the Fund investment universe.
- Manager Address : Suite 3, Level 13 88 Phillip Street Sydney NSW, Australia 2000
- Phone : 1300 997 774
- Website : https://www.altiusam.com/
- Contact Email : australianunitywealth@unitregistry.com.au
- Contact Page : https://www.altiusam.com/contact-us