September, 2023
For the month ending September, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.87% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index.
Bond markets saw a sustained move to decade highs in yields over the month of September as the ‘higher for longer’ path of cash rates became ingrained in market participants psyche. Other catalysts adding to the increase in yield included the return of sizeable corporate bond issuance following the northern hemisphere summer hiatus , as well as ongoing acknowledgement of supply and demand disconnect. In Australia, we saw 10 year bond yields push to decade highs above 4.5%, and this drove riskier assets like equities to sell off also.
In the world of central banks, the US Federal Reserve (US Fed), Reserve Bank of Australia (RBA) and the Bank of England kept cash rates on hold as expected, while the European Central Bank hiked their cash rate by 0.25% which was not market consensus. The US Fed dot plot garnered market attention as rate cuts in 2024 were reduced from the forecast profiles, adding to the ‘higher for longer’ messaging that was also mentioned by many US Fed speakers across the month.
The RBA will be carefully watching the quarterly CPI data that will be released in October after the September monthly release showed a small re-acceleration in the monthly reading from 4.9% year on year (yoy) to 5.2% yoy broadly driven by an increase in the oil price over the month which led to increased fuel prices that showed up in the data. Whilst it is not our base case, further upside surprise will increase the chances of another move in the RBA cash rate.
The ongoing rise in yields is starting to put some pressure on risk markets, with the ASX200 finishing the month -3.5% and the S&P500 -4.2%, with the VIX widening also as volatility is starting to rise. The bond yield surge is starting to draw parallels to the GFC, where a ‘soft landing’ was talked about frequently in the financial press and it was all fine until of course it wasn’t! History shows us that higher yields and therefore the higher cost of capital causes something to break. We believe that this stands true in the current cycle. What we don’t know is what or when.
The portfolio traded with a tactical short bias over the month as momentum indicators kept us from getting too overweight. In saying this, by the end of the month the portfolio had turned to a long duration position as value indicators reduced our shorts. Semi-government and supranational bonds tightened as a spread to Australian Commonwealth Government Bonds which was accretive to portfolio alpha with our modest overweight position.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/65260460a7a5458cb08bf965_CC-JCB-Active-Bond-Fund-Monthly-Report-September-2023.pdfJune, 2023
For the month ending June, the CC JCB Active Bond Fund - Class A units (the Fund) returned -2.46% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. Further hawkish rhetoric and a number of developed market central banks continuing the rate hiking journey saw bond yields broadly trade higher over the month of June, aided by resilient job markets and ongoing inflation concerns.
The FOMC delivered a ‘hawkish pause’, after ten consecutive meetings of rate hikes with the Fed Funds rate kept at 5.25%, allowing the lagged effects of monetary policy to continue to strangle demand and put a dent in inflation . US headline CPI had printed at 4.0% in the days prior to the meeting, which allowed the US Federal Reserve to ‘skip’ further rate hikes this month, although the fight is by no means over.
The Reserve Bank of Australia (RBA) surprised the market with another rate hike to 4.1% in June following on from the Fair Work Commission decision to increase the minimum wage by 5.75%. In a speech the day after the RBA Board Meeting, Governor Lowe noted the ‘narrow path’ the Australian economy is treading whilst trying to maintain healthy employment levels and at the same time decrease inflation expectations and allay fears of the damage that a wage spiral may have on the economy.
The Board meeting minutes showed the decision was ‘finely balanced’ . With the monthly CPI number released late in the month showing a 5.6% yoy increase, down from 6.8% the prior month, we believe the RBA are winning the fight against inflation. Elsewhere, we saw the Bank of Canada implement a surprise 25 basis points (bp) hike to 4.75%, and Bank of England 50bp hike to 5.0% as expected. The European Central Bank also moved in line with expectations and hiked 25bps to 3.5%. In addition, the Norges Bank hiked 50 bps to 3.75%, the Swiss National bank hiked 25 bps to 1.75%, and the Riksbank hiked 25 bps to 3.75%.
We believe that central banks are approaching the mature stages of their hiking programs, and we are getting close to terminal rates in most developed markets. Rates are now sufficiently restrictive to see a slow down in demand and refinancing risks for corporates who are coming off honeymoon rates that were locked in during the ultra low-rate period of the pandemic. So far, the consumer has been remarkably resilient, and it is too early to be even thinking about rate cuts.
The time is near for central bankers to take stock and allow tight monetary policy to work its way through the economy. The most notable moves in bond markets were in the front end which led the sell off to higher yields. This resulted in a flattening of global yield curves, with the US 2s10s curve closing back at -106 bps (near the pre SVB close), and the Australian 3s10s bond futures curve moving from 20 bps to 2 bps. Flatter yield curves (especially prolonged negative yield curves) have historically been a reliable indicator of pending recessions; however, they do take time.
The JCB portfolios entered long duration positioning at 3.75% in 10 year Australian Commonwealth Government Bondss, and then added further duration at the 4% level. These are levels we have been targeting as the top end of the range and are levels that we see to be a sufficiently restrictive level from a monetary policy perspective. It is also an attractive level when compared to the earnings yield of the S&P 500 (around 4.1%) when you can invest in a continuously compounding and self-correcting asset class of high-grade bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/64b0889e0f177408736dc280_CC-JCB-Active-Bond-Fund-Monthly-Report-June-2023.pdfMay, 2023
For the month ending May, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.27% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index.
Overall the month of May saw global yields drift higher in yield across developed markets as markets took out pricing of rate cuts that had appeared in 2024 money market curves as a lingering outcome of the banking worries of March. Central bankers globally pushed back on this pricing. Outside of central banks and data, the other key catalyst driving headlines in markets was the pending debt ceiling negotiations, with parties finding enough common ground to send the deal to the Senate by the final week of the month. The US 10y yield finished the month 20 basis points (bp) higher at 3.65%, and the Australian 10year bond was 30 bp higher to 3.59%.
Central banks continued to tighten policy with the Reserve Bank of Australia (RBA) surprising the market with a 25bp hike to 3.85%, whilst the Reserve Bank of New Zealand, European Central Bank and Bank Of England all delivered 25bp rate hikes as expected lifting rates to 5.5%, 3.25% and 4.5% respectively. The RBA had been expected to pause at the May meeting, however the 7% yoy CPI print for Q1 and a 3.5% unemployment rate was too compelling for the RBA to sit on their hands, especially on the back of the RBA Review findings, and the desire to maintain credibility and prevent inflation expectations from spiraling higher.
The portfolio overall traded a short bias on the month, as JCB believed the market was pricing in too much easing in the face of sticky inflation. Price momentum towards higher yields added to our bearish sentiment, however JCB turned long at 3.75%. JCB believe that entry levels of between 3.75-4% are very attractive medium term levels to be adding to long duration positions ahead of the northern hemisphere summer where bonds seasonally have seen strong performance historically.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/648947039a2a088dabce5ee9_CC-JCB-Active-Bond-Fund-Monthly-Report-May-2023.pdfJanuary, 2023
For the month ending January, the CC JCB Active Bond Fund - Class A units (the Fund) returned 2.89% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.
Global bond markets rallied strongly in the month of January, retracing the moves of late December following the BoJs surprise increase to the YCC target band and then further sell-off to bonds in the low liquidity period between Christmas and the new year. These enhanced yields to begin the year attracted significant interest into the fixed income asset class which saw a strong rally of around 3% for the index. Further drivers of the positive return of the bond market was the softer hard data points in the US, including weaker than expected US ISM Services and the US CPI coming in at 6.5% yoy. The market consensus that we have seen the highs in US inflation. The US wages number also came out under market expectation which gave further confidence to bond bulls.
The January Bank of Japan meeting was highly anticipated following the big moves in December, however this turned to be markedly dovish with no further changes to the YCC target, and continued suppression of yields followed.
Reports from Europe that the ECB would only consider a 25 bp hike in March along with a lower than expected Eurozone CPI print provided support for the bond market there. The peripheral European markets and the Australian bond markets in particular enjoyed a tail wind from that BoJ decision as the threat of repatriation flows diminished.
The Canadian Central Bank started the year with a 25 bp hike to 4.50% however was the first Central Bank to offer guidance of a step down from tighter monetary policy as they signaled a shift to a “conditional pause”. Locally, Australian bond movements generally outperformed US Treasury yields up until the final week where the quarterly inflation data was released, showing a headline rate of 7.8% yoy. This was a shock to the market and resulted in heavy selling of ACGBs ahead of the first RBA meeting for 2023 in February.
The CC JCB Active Bond Fund began the month with a long bias accreting some positive alpha over the index before moving to underweight duration ahead of the Bank of Japan meeting, as we saw balance of risks to higher rates as the BoJ would further tighten their monetary policy. This was not to be and the was detractive to the performance of the portfolio, however this was risk managed as per our process and we recouped some gains having an underweight duration position into the Australian CPI data, noting that markets were stretched to the lower side with respect to yields. We hold overweight positions in short end semi governments and supranationals , and added to our green and sustainable linked bond holdings over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/63eb15223f427257050081c4_CC-JCB-Active-Bond-Fund-Monthly-Report-January-2023.pdfDecember, 2022
For the month ending December, the CC JCB Active Bond Fund - Class A units (the Fund) returned -2.37% (after fees), performing in line with the Bloomberg AusBond Treasury (0+Yr) Index.
The main thematics in the month from a forward looking macro-economic perspective into 2023 focused on the opening up of China from Covid-19 restrictions, a pivot from the Bank of Japan (BOJ) monetary policy, continued hawkish viewpoints from the European Central Bank (ECB) and validation of peak global inflation. Despite the lower than expected November US CPI print mid-month which came in at only 0.1% and was the second consecutive downside miss, the bond market could not sustain the rally into year end. Bond markets were caught off guard from the hawish rhetoric at the ECB meeting on 15th December which came on top of the as expected 50 basis point (bp) rate hike – with President Lagarde suggesting that “a significant rise at a steady pace means that we should expect to raise interest rates at a 50 bp pace for a period of time” . The BoJ also sprung a hawkish surprise into Christmas as they modified their long held Yield Curve Control policy as they widened the range by 25 bps with a maximum yield on 10yr Japanese bonds increased to 0.5%. This saw Japanese yields jump by over 20bp and the Yen rallied by almost 4% on the day. The final blow for bond markets into year end was the announcement from Chinese authorities that all Covid-19 quarantine measures would be removed from 8 January ramping up expectations of a pick up in demand and growth through the global economy in 2023. The heavy bond supply calendar in January also resulted in front loaded selling into diminished holiday market liquidity that exacerbated the global bond market weakness for the month. Australian rates market underperformed sharply into year end with low liquidity evident as corporate deal related selling, hedge fund futures selling and semi -government supply, were all micro factors that augmented the bearish sentiment from the BoJ hawish move and the eagerly awaited reopening of China. The fear that the higher yields emanating from Japan as a result of their tilt to monetary policy hit Australian bonds the hardest in expectation of Japanese investors reducing their foreign bond exposures. Looking forward the portfolio will look to tactictally explore the ranges as the anticipated slowdown in global growth from the rapid increase in financing costs is balanced against the Central Banks assessing their 2022 mandate to slay the inflation dragon and the implications of the re-opening of the Chinese economy .
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/63c49ca6d8a8a783479e282b_JCBABF_A_202212.pdfSeptember, 2022
For the month ending September, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.46% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.
Hawkish central banks. Higher than expected inflation and other upside data surprises. These two headlines could have led most of the monthly commentaries for 2022, however what was added to the month of September was a UK ‘mini-budget’ which contained fiscal easing measures that led to an unprecedented sell off in UK Gilts in the manner of a VAR shock, taking global rates for the ride, finishing the month significantly higher in yield.
As the inflation genie continues to surprise to the upside, central banks continued to raise their respective cash rates. In September, these included hikes from: FOMC (+75bps) RBA (+50bps), Riksbank (+100bps), BoC (+50bps), SNB (+75bp), Norges Bank (+50bp), and BoE (+50bp).
The UK mini-budget was nothing short of a disastrous piece of policy as the Truss government announced measures to ease fiscal conditions with proposed tax cuts and significantly larger borrowing programs for the UK . This saw a Gilt led sell-off, taking global fixed income yields higher, before the Bank of England needed to step in and buy Gilts to “restore orderly market conditions”, effectively emergency QE.
Overall bond volatility continued in September, with the US 10y Treasury trading an 85bp range (3.17% to 4.02%, closing the month 64bp higher. The MOVE Index (a measure of bond volatility) was seen to reach a high of 159, which is only just below the record of 164 seen in 2020. Australian bonds outperformed comparatively, closing the month 31 basis points higher. The key driver of the outperformance was the improved budget measures announced by Treasurer Jim Chalmers, as well as an RBA that hinted most of the hard lifting had been done by the RBA in the current rate hiking cycle, and the speed of the hikes was to slow. The higher bond yields and hawkish central banks continued to weigh on risk assets, with fears of recession becoming common place, and seemingly the narrative in markets is now that good news (i.e. better data) is bad news (Central banks need to do more and risk markets will continue to be hit).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/634799b06de580bc233b7099_CC-JCB-Active-Bond-Fund-Monthly-Report-September-2022-1.pdfJune, 2022
For the month ending June, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.39% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.
Central Banks were out in force tightening monetary policy in the month of June as the US Federal Reserve delivered a 75 basis point hike and the Reserve Bank of Australia lifted the cash rate by 50 basis points. The hawkish tone triggered an aggressive sell-off in rates which led to extended losses in risk markets, and saw US equity markets enter bear market territory, led by the NASDAQ (proxy for growth assets) which sold off 8.7% in the month of June to be down close to 30% since the turn of the year.
The first half of 2022 has been very difficult for bond markets with the worst returns for sovereign bond funds going back decades, let alone funds that have credit exposure added to their sovereign holdings. Green shoots are appearing for bond holders now, with the asset class now beginning to exhibit the diversifying characteristics to listed risky asset markets that we have come to expect over time. In fact, while bond markets were the first asset class to see substantial losses this year, since their lows on June 22nd, we have seen a positive return, whilst equities have continued their slide
Going forward, JCB believes bond markets could continue to provide solid returns over the rest of the year as recessionary fears appear certain to increase and then very likely be crystalised in the next 6 months or so. A global recession is now expected as the base case outcome with demand destruction and weakening momentum widely evident in many leading data releases. JCB also believes it is likely that the US economy has already entered a technical recession, as the widely followed Atlanta Federal Reserve GDP nowcast model suggests that current Q2 GDP is -2.1% as at the end of June, following on from a -1.5% in Q1.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/62d8ad6026f8533941a578fa_CC-JCB-Active-Bond-Fund-Monthly-Report-June-2022.pdfApril, 2022
For the month ending April, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.45% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index. April 2022 was the month that the Reserve Bank of Australia (RBA) lost its “patience” stand and took the steps to begin normalisation of monetary policy.
Cross asset volatility picked up in the month globally, with equities, credit and fixed income all seeing negative returns for the month as global inflation continued to accelerate and central banks are set to continue to tighten policy, targeting inflation and destroying demand with the blinkers on as asset prices took a heavy hit. US inflation data showed a new cycle high of 8.5% year on year, however the consensus is that we have now seen peak inflation and we should start to roll over from now onwards.
US Fed speakers started toying with the idea of aggressive rate hikes, with the potential for 75 basis point (bp) hikes, however it became market consensus that the preferred path would be for 50bp hikes to get the Fed back to a more neutral rate of funds that was no longer stimulatory. Locally, the highly anticipated Australian CPI figures were released in the final week of April which showed that inflation was running at uncomfortably high levels (5.1% year on year vs the RBA target band of 2-3%), much like the rest of the world, and putting the RBA in line for multiple rate hikes over the rest of 2022. JCB sees the cash rate reaching 1.5% by year end.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186819939.pdfJune, 2021
For the month ending June, the CC JCB Active Bond Fund - Class A units (the Fund) returned 0.97% (after fees). The Fund underperformed the index in what was a month of two halves. The U .S. Fed meeting mid-month caught global financial markets off guard and stalled the 20 bp rally in Australian rates, although the global rates rally continued into month end defying the bearish rates consensus and positioning. The quarterly expiration of the Australian rate futures exaggerated some price moves although the underlying theme for the month was curve flattening and Australian rates outperformance of its peers.
The Fund trimmed some exposure in the long end of the curve and deployed some micro curve structures in the belly of the curve as JCB took advantage of the U.S. Fed inspired cheapening in the shorter end. The U.S. Fed meeting on 16 June triggered volatility through markets although the U .S. Fed kept the target range at 0-0.25% it altered the pathway of projections with the FOMC dots projecting 2 hikes in 2023 and comments from U .S. Fed Chairman Powell suggested that the U.S. Fed was more hawkish than what the market had priced in.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174208174.pdfDecember, 2020
For the quarter ending December, the CC JCB Active Bond Fund - Class A units (the Fund) returned -0.61% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. The Australian rates market started the month in the middle of the recent range, as it waited for the US FDA vaccine approval and fiscal deal negotiation. The disappointment of US labour data raised the expectations of another stimulus package.
Global rates markets sold off and Australian government yields reached the intra -month high following the data release. As the Northern Hemisphere entered the peak of winter and mobility increased during the festival season, the virus infection also accelerated. Bond yields fell slightly in the second half of the month but still ended higher than where they were at the beginning of the month. Domestically the market remained subdued with the SFE quarterly bond futures roll mid-month and the AOFM and RBA also resting on the sidelines providing little impetus for a decisive move away from the 1.00% level in 10 years. The Fund will maintain the duration neutral stance with flattening bias into January as markets remain on hold for the eventual finale of the 2020 election with a “Blue Wave” still in the offing on the outcome of the Georgia Senate run-offs.
JCB remains cautious on the hype around the vaccine news in the near term. Logistic issues as well as the lack of confidence could drag out the vaccination program. The surge of infection cases and tightening of social distancing measures would further delay the economic recovery. JCB is happy to express the long bond view via the flattening trade and is looking for tactical opportunities to add alpha in the coming months.
The long-end still offers great value with a short-end anchored by the lower for longer edict of the RBA and the compelling currency adjusted returns for the offshore investor in a world starved of yield . The return of the RBA buy program next month and market expectations of another 100bln QE to be announced prior to mid-year should limit corrections.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/163330111.pdfticker: CHN0005AU
release_schedule: Quarterly
commentary_block: Array
factsheet_url:
https://www.jamiesoncootebonds.com.au/performance
Performance Report
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Australia
peer_benchmark: Fixed Income - Bonds - Australia Index
broad_market_index: Australian Bond Composite 0-10Y Index
structure: Managed Fund
fund_features:
CC JCB Active Bond aims to outperform the Bloomberg AusBond Treasury 0+ Yr Index (Benchmark) over rolling 3 year periods. The investment strategy is to use fundamental and technical analysis to make individual bond security selections and adjust duration exposures (against the Benchmark) with a view to generating the optimal risk-adjusted portfolio.
- Manager Address : Level 30, 101 Collins Street Melbourne VIC 3000
- Phone : +61 3 8580 0088
- Website : https://www.jamiesoncootebonds.com.au/
- Contact Email : info@jcbf.com.au
- Contact Page : https://www.jamiesoncootebonds.com.au/contact