September, 2023
Markets have hit the wobbles as ‘higher for longer’ interest rate expectations and the removal of 2024’s interest rate cuts threaten to deliver a crushing blow to valuations the world over. Many folks in markets are now expecting a market crescendo or credit event as we approach the lower liquidity year end period. Higher for longer interest rate expectations - i.e., removing expected rate cuts and keeping Central bank rates at recent historical elevated levels - have caused indigestion across the complex of both bonds and equities, forcing a nasty reassessment of the ‘soft landing’ outcomes we are all hoping for. It does, however, seem incongruous to us that ‘higher for longer’ and ‘soft landing’ can co-exist. There is significant irony in the linkage that those very soft-landing expectations, and thereby the failure to tighten financial conditions via lower asset valuations, wider credit spreads, less spending and consumption, will ultimately lead to a hard landing by generating a credit event under higher bond yields. By driving interest rates higher, asset markets will question debt sustainability and refinancing risks, which can trigger a negative and pro-cyclical pricing loop.
Investors have been conditioned and calibrated to expect support via rate cuts and policy intervention (such as quantitative easing or QE) at each nasty market episode since the Global Financial Crisis (GFC). It is perhaps a ‘take your medicine moment’, where the expected macro slowdown is met with minimal market support , characterised by limited rate cuts and QE programs. Without ongoing policy interventions and smoothing over each crack in the complex, it is a stand on your own feet moment of genuine price discovery, to forcibly achieve the ultimate goal of fully extinguishing inflation. This is a tremendously difficult backdrop for risk markets, characterised by higher funding costs, the rebirth of credit defaults and delinquencies, all underscored by the prevailing trend of slowing economies. The difference between a benign or destructive outcome comes down to the magnitude and rate of change to the growth outlook, as a result of these market moves.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/6526142377601c4a757f7c7c_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-September-2023.pdfAugust, 2023
After the rapid rise in the cost of capital the world over, economies are beginning to falter. China, Germany, Holland, New Zealand and now Australia are rapidly slowing, bringing high quality fixed income back on the radar as the window for the next stage of the investment cycle approaches. With many other asset classes still enjoying lofty valuations after an extraordinary period for investors, the reset of global yields in fixed income bond markets continues to draw in fresh capital, as asset allocation from smart money continues to rebuild exposures to position for any further economic deterioration expected under restrictive policy settings as real yields remain at historically high levels.
The material reset of yields through the rate hiking cycle has delivered some markets back to yield levels not seen since the GFC, with many US Government Bonds now yielding more than 5.00%. This reestablishment of yield makes for a compelling income alternative, whilst also providing a significant cushion against further rate rises.
JCB believes the risk/reward for high quality government bonds as an asset class has becoming very appealing from a medium to long term cyclical view for inclusion in a balanced portfolio. The return profile for Treasuries over the next year at circa 4.25% yields are also skewed in favor of the buyer as any rally allows greater rewards from the capital appreciation and the coupon reinvestment, whilst a further rise in yields will be somewhat mitigated from coupons received.
Strong policy support and a booming economy have had many portfolios set up to be kicking with the policy wind , running with plenty of risk looking to keep the scoreboard humming. As those global winds (and policies) have turned and inflation attempts to return to within acceptable levels for Central Banks , markets will remain in a transitional phase that will require some nimble adjustments. Central Bankers have already acknowledged that the transmission lag needs to be monitored. JCB is watching the developments in the UK rates market keenly , they have been the canary in the global bond markets over the last few years. The recent statement from BoE bail was quite telling . Bailey said UK interest rates are probably “near the top of the cycle” because the fall in the inflation rate will continue and likely be quite marked. Bailey said much of the surge in the key rate to 5.25% from 0.1% at the end of 2021 is yet to be felt; “We’ve definitely got a substantial amount of transmission to come”; “It appears that there is a longer transmission, that the lags are longer. We have to factor that in our policy decision .” Consideration is also required between access to capital in public markets, and the differences in private markets where investment horizons and lock ups can be significantly longer. Also make sure asset offering pass the sniff test. If public markets have had huge pullbacks over 2022, shouldn’t that impact private markets also? What does the go forward look like for those offerings which are yet to reset?
With Central Banks at the end of their tightening cycles and the specter of the global growth slowdown lurking ominously, many leading indicators such as inverted yield curves, tightening bank lending standards, slowing of mortgage applications, and weakening labour markets have historically been prescient indicators of a recession . Economic ills in China and Germany, historically countries that navigate through economic growth slowdowns , would suggest that the recent velocity of monetary tightening is impacting manufacturing and exports and the broader global economy.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/6507c88d3dc74b677205b9d9_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-August-2023.pdfJuly, 2023
A large miss in Australian inflation data for the second quarter reinforces the global disinflationary theme which is bringing Central Banks towards terminal rates after a vicious interest rate hiking cycle. Global supply chains have normalised, abating inflation in most goods and materials, whilst commodity and energy markets have cooled considerably from the shock disruptions around the outbreak of conflicts between Russia and Ukraine. It is likely that many Central Banks have delivered their final rate hikes on a preset path and will now be driven by ‘data dependency’. We believe this is the end of ’forward guidance,’ a key pillar of policy communication since the global financial crisis (GFC), with communication having more strategic ambiguity. After such a dramatic shift in the global cost of capital, a ‘pause and assess’ moment is warranted as inflation cools, settling towards its mid -run trend in a post pandemic world. The recent decrease in inflation numbers is certainly a significant relief compared to the lofty peaks of 9% in US CPI. The last year on year reading was down to just 3%. However, the fight for ’the last mile’ towards the inflation target of 2-3% will not be a simple task, as the easiest part of disinflation (the base effect of data rotation) is now complete, making the journey towards the target more challenging.
As inflation picked up around the world led by US markets, Australian inflation was a material laggard in the global process, with a more than six-month lag to US data. US year on year inflation numbers exceeded 4.00% in April ’21, whilst Australia did not breach this 4.00% level until Jan ’22. As global inflation pressures have abated with the normalisation of supply lines and goods prices, further falls in domestic inflation should be expected following this lower momentum and global trend.
As we look ahead, there are competing forces at play that will impact inflation. On one hand, there is a decline in services inflation, driven in large part by rents and slowing global economies. On the other hand, the cyclical nature of the commodities and energy cycle will have an impact. As a result, is it anticipated that US inflation, acting as the global barometer, will stabilise between 3-4% over the balance of 2023. Specifically, the July data is expected to show a slight increase to 3.2%.
The good news on the inflation front is that these competing data forces should significantly moderate the rates of change. Services inflation should continue to fall, driven by the large category of owners’ equivalent rents, which exhibit a long lag within inflation data due to annual rental resets at CPI inflation levels. This creates a classic self-reinforcing loop, making it challenging to break, where rental agreements are extended as they fall due at spot CPI year on year levels, on a rolling basis. This feeds previously high CPI figures into rental prices, thereby increasing future CPI with higher rental prices in that subcomponent, given the long lag until headline inflation cools (headline is now 3%) and the data enjoys relief with a laggard period. Continued cooling in this important subcategory should help to deliver lower headline inflation and reduce the volatility of the incoming data series, as it settles towards trend after a period of violent amplitude. The addition of the fastest and largest rate -hiking cycle in a generation should temper demand, aided by easing supply conditions and the expected softening of the labour market, responding to the ongoing monetary policy tightening that began in global markets over a year ago.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/64db306ea7c87199d162e30e_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-July-2023.pdfJune, 2023
Following on from the volatile start to the year, the second quarter was a touch more subdued for asset markets as financial contagion from the banking issues of March remains contained for now, however the impact and the direction of global interest rates continued to be hotly debated and closely monitored as we approach the zenith of the tightening cycle. The cumulative effects of Central Bank tightening continue to keep participants on watch as the timing of the global recession remains hard to isolate, particularly given the conflicting evidence that is arising from key data and the divergent directions of different asset classes .
The manufacturing sector is historically a prescient indicator of the state of the economy and probably best reflects the global story, whilst the services component of that sector runs hot on pent-up consumer demand. The manufacturing survey remains steadfast in recessionary territory due to tightening lending standards and the higher cost of capital. This divergence is creating headaches for the monetary authorities as goods inflation continues its trajectory lower, whilst services inflation remains sticky. Central Banks face a delicate balancing act as they strive to steer inflation into an acceptable level in the “vicinity” of the mandated 2% level - creating a challenging conundrum.
Like the concerned parent threatening their recalcitrant children to implement a ban on all electronic devices in the household, we expect to see continued tough talking from Central Bank officials as they steer markets away from pricing in a rate cutting cycle in the near term.
This was evident at the recent Central Baking Forum in Sintra, Portugal where Federal Reserve Chair Powell , European Central Bank President Lagarde, Bank of England Governor Bailey, and Bank of Japan Governor Ueda , all waxed lyrical on monetary policy and their prospective thoughts. With the exception of Ueda, who acknowledged that underlying inflation in Japan remains below 2%, all others emphasised their commitment to combat inflation and are adapting policy to achieve that goal. The Central Bankers also suggested their respective institutions will now be moving interest rates on a meeting-by-meeting timeframe as they become data dependent. This underscores the uncertainty with regards to the global economic outlook and the perils of implementing monetary tightening late in the cycle.
Consider Europe as an example, where stubborn inflation and the Central Bank’s aggressive round of interest rate hikes have inflicted pain on the Eurozone economy, leading to a technical recession with real GDP declining by 0.1%, quarter-over-quarter in the final quarter of 2022 and the first quarter of 2023. Furthermore, the once proud German economy now bears the unfortunate label of the “sick man of Europe,” as recent employment weakness has pushed the unemployment rate to a two year high of 5.7%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/64b08acde5b8f9ef35f62c27_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:April, 2023
For the month ending April, the CC JCB Active Bond Fund - Class A units (the Fund) returned 0.11% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index. The month of April was somewhat calmer than the extreme volatility that the bond market experienced in March .
Overall, Australian 10yr bonds traded a yield range of 3.15% to 3.56% (a range of 41.5 basis points (bp) vs 84bp in March). This was seen as a consolidation month, affected by the school holidays, Easter and ANZAC Day breaks locally. Banks were in the headlines again this month following the events of March (notably SVB and Credit Suisse collapses), as risk sentiment remained shaky.
Short sellers continued to look for opportunities of weakness in specific bank names that were exhibiting weaker fundamentals and deposit outflows with great success and profiting handsomely from these trades. US data was mixed, with inflation staying sticky and the jobs market staying tight, while aspects of growth are showing signs of slowing down. The Reserve Bank of Australia (RBA) paused for the first time in the current rate hiking cycle at their April Board meeting to “assess the impact” of the increases of rates to date and awaiting the all important quarterly inflation data in the last week of April.
The Reserve Bank of New Zealand (RBNZ) on the other hand surprised the market by hiking 50(bp) at their April Board Meeting in the face of upside risk to medium term inflation expectations . Looking forward, as at the end of April, the RBA had one more rate hike priced in for 2023, while the FOMC was pricing in a cutting cycle. JCB sees the end of the hiking cycle as very close to done now and it will take an acceleration in inflation to see cash rates move significantly higher. Whilst possible, this is likely to be an exogenous shock.
On the other hand, things are starting to break in the economy (e.g. regional banks) and if this does see contagion spreading and confidence in the system to continue to diminish, then rate cuts could be on the agenda some time in early 2024. In what was a heavy issuance month with a new syndicated ACGB 2034, the Active Bond Fund traded with a short duration bias into the large bond issuance event.
The Fund was overweight the 2yr part of the semi-government and Supranational curve which added positive alpha and also benefitted from a steepening 10x30 curve position.
File:March, 2023
For the month ending March, the CC JCB Active Bond Fund - Class B units (the Fund) returned 3.58% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index.
March 2023 is one of the months that will go down in history as one of the most volatile of all time. The MOVE Index (the bond market version of the VIX that measures daily volatility) hit levels not seen since the depths of the COVID-19 crisis of March 2020. Over a period of 13 trading days straight, the 2yr USTs traded an unprecedented 20 basis point (bp) daily range. These are not normal times! So what happened..?
The biggest event was the collapse of Silicon Valley Bank (SVB) which sent shockwaves through the financial markets. It was March 7th when US Federal Reserve, Chair Jerome Powell, noted "Nothing about the data suggests to me that we've tightened too much" before the Senate Banking Committee. By March 8, SVB was in trouble and raising capital, and two days later SVB was gone. This is an example of the ferocity of the financialisaton of the banking work, with deposits in the order of $42bn withdrawn in a matter of hours via online transactions, in a practice that back in the days of the GFC would have taken weeks to see people lining up once the branch opens on a given morning.
The next bank to fall was Credit Suisse, an institution with 160 years of history, and then rumours also were swirling about Deutsche Bank being in trouble, although this was driven by a CDS trade with a measly notional of just $5million. This is a minor trade in the scheme of things, but we are not living in normal times.
On the data front, inflation and employment continue to be the big ticket items and receiving the most attention from market participants. Tight employment conditions globally continues to be a thorn for central bankers, while inflation data is easing, however still at uncomfortable levels. In the face of the data, the Federal Open Market Commitee , European Central Bank and Reserve Bank of Australia all continued their mission to focus on the inflation fight and hiked rates at their respective meetings, although we are now getting to a point where things are starting to break , which has been their aim all along by providing headwinds to the economy with the increasing cash rates and therefore cost of money.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/643f55c98dc59db32cba5c75_CC-JCB-Active-Bond-Fund-Class-B-Monthly-Report-March-2023.pdfFebruary, 2023
For the month ending February, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.43% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index. The month of February saw bond yields grind higher and curves flatter as key global data points showed signs of reacceleration, and inflation data surprised to the upside, in a move that was not pleasing to the worlds central bankers. February began with bonds rallying and saw 10y UST yields trade as low as 3.35% before the data surprised to the upside, which was a catalyst for hawkish rhetoric from central banks from both sides of the Atlantic, and right down to Australia. The explicit warings that rates may need to stay higher for longer saw the 10y UST traded up to 3.98% which was where we finished the month. Locally, the RBA lifted the cash rate by another 25 basis points with the promise of more to come following the stronger than expected CPI print at the end of January, noting that "further increases in interest rates will be needed over the months ahead.". As the month passed by however, Australian data began to see the effects of the higher rates begin to hit the consumer, as retail sales, monthly CPI data, wages and unemployment data all surprised to the down side, which brought fears that Australia may in fact be getting towards the end of the hiking cycle and due for a pause by the middle of the year. From a duration point of view, we began month long as global consensus was a pivot just around the corner. Bond yields got to multi month lows before consistent messaging from global central banks pushed back on pricing. The Active Bond Fund entered an underweighted duration position at around 3.00% in 3y bonds. We took profit and at month end we saw bonds now oversold and momentum turning so we have entered an overweight position of around 0.3 years. The portfolio was also positioned for flatter curves which was additive to alpha. Primary issuance was very busy in the debt capital markets space and was very well absorbed by real money managers such as JCB, as well as reports that European central banks had been consistent buyers of Australian spread paper, as well as ongoing demand from domestic balance sheets. The JCB Active Bond fund was active in the primary issuance deals, and we added to our ESG product through the EIB 4.2% 2028 and the Asian Development Bank 2026 Gender Bond. The portfolio was positioned with an overweight position through semi governments and supranational spread product which performed well over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/6410fa857c32735ff08885b3_CC-JCB-Active-Bond-Fund-Monthly-Report-February-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/2021/01/63eb13a872a72d2858941778_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/2021/01/63c49de74ebe4d004badb8c1_JCBABF_A_202212.pdfNovember, 2022
For the month ending November, the CC JCB Active Bond Fund - Class A units (the Fund) returned 1.40% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. Bond markets rallied over the month of November as data points, while still pointing towards continued tightening required from global Central Banks, began to exhibit signs of a slowing in momentum as the extreme weight of monetary policy tightening seen in 2022 starts to bite.
In the world of major Central Banks, the hiking of cash rates continued, including the US Federal Reserve (US Fed) (+75 basis points (bp) to 4.0%), Bank of England (+75bp to 3.00%), Reserve Bank of Australia (RBA) (+25bp to 2.85%) and the Reserve Bank of New Zealand (+75bp to 4.25%). Expectations of moderations to the pace of these hikes in coming months is now the more consensus view, which has driven bond markets to lower yields and therefore positive returns for bond holders as terminal rate expectations also decline.
With respect to the US Fed , this bias towards a reduction in the velocity of rate hikes was confirmed in a speech by US Federal Chairman , Jerome Powell on November 30, noting that “The time for moderating the pace of rate increases may come as soon as the December meeting”. This helped the bond market to finish the month near its yield lows for the period. On the date front, the biggest mover in markets was the release of the US CPI on November 10th. The monthly core CPI growth was the slowest in over a year, which in turn triggered the biggest rally in US 2y Treasuries since 2008 and the S&P500 had its biggest daily rally since April 2020.
This price action gives a good indication of how short the market positioning had found itself as consensus trades were turned over. Another key driver of risk sentiment in November was the potential stepping away from the COVID-zero strategy in China. Officials said they would look at measures such as to increase vaccination rates in the elderly and reduce quarantine time for travelers.
This was welcomed by risk markets. It will be interesting to see the effect on fixed income markets, as on one hand this will be an easing of supply chain constraints, but on the other it will increase global demand for travel and services. Locally, Australian bond price action was driven by offshore factors, and locally by the RBA which seems to want to continue on the path of 25bp hikes into at least Q1 next year before JCB expects a pause. November also saw the syndicated issuance of the new Australian Commonwealth Government Bonds 2034 which weighed on bond market performance in the first half of the month before seeing a strong return for the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/6398f245f66c8887661d1c02_CC-JCB-Active-Bond-Fund-Monthly-Report-November-2022.pdfOctober, 2022
For the month ending October, the CC JCB Active Bond Fund - Class A units (the Fund) returned 1.12% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. In a year of volatility across the global economy and financial markets, October was no different, with as many headlines and catalysts for prices to oscillate than any month of the year so far. Having warned the market in previous communication that the pace of hikes may slow down, the global bond market was still caught off guard when the Reserve Bank of Australia (RBA) moved back to a 25 basis point hike (from 50 point hikes at the prior 4 RBA Board meetings).
This had an outsized impact on global markets as the hope that central banks globally may be entering a coordinated slowing in the aggressive hiking cycles that we have seen over 2022, seeing bond markets rally to lower yields immediately after the decision. This bond market rally was short lived however, as markets again were faced with strong US data prints including upside surprises to the CPI (Headline +8.25 YoY) and continued labour market strength (263,000 jobs created). These data points led to new cycle highs in 10y UST yields before the bond bulls returned to the market and saw aggressive rallies in the order of 60 basis points in the last week of October. We have spoken a lot this year about the potential for central bank divergence in their policies due to different fundamentals, and in the final week of October, these themes are finally starting to come into fruition in a year when the correlation of bond markets across all central banks has been led by aggressive tightening out of the US. Other central banks, battling their own domestic inflation issues have also been affected by the global issues and yields dragged higher by the US economy.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/637324294d601227b2687a5e_CC-JCB-Active-Bond-Fund-Monthly-Report-October-2022.pdfSeptember, 2022
For the month ending September, the CC JCB Global Bond Fund – Unhedged Class returned 3.57% (after fees), outperforming the Bloomberg Global G7 Total Return Index Value Hedged USD (converted to AUD).
The Underlying Fund outperformed in the month of September with an underweight bias expressed for most of the bond sell-off over the month. Early in the month, Japanese holdings were unwound and converted into US short end Treasuries given the better foreign currency adjusted yields on offer. The Underlying Fund closed underweights through the month and tactically explored the ranges in the Treasury market. The underweight in Italy versus Germany was maintained in anticipation of continued underperformance as the onerous debt load and higher servicing costs continues to weigh on Italian bonds as well as the souring risk sentiment feeding through to credit spreads. With US economic data surprised by the upside - in particular the CPI number - and as the US Federal Reserve (US Fed) hiked rates by 75 basis points (bp) for the third meeting in a row and forecasted a further 125 bp of tightening before year-end. US Fed Governor, Jerome Powell, also emphasised that ‘the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer”. Bond markets remained heavy into month end and the US 10yr yield breached 4% for the first time since 2008 under the continued narrative that Central Bank actions needed to slay the inflation dragon. UK markets provided the volatility for the month as the announcement of fiscal expansion by Chancellor,Kwasi Kwarteng, compounded inflationary concerns and triggered a massive move lower in the currency and the price of long end bonds with the GBP at one point 10% lower for the month. The violent movement in the long end bonds triggered financial solvency speculation amongst the UK pension community which warranted the Bank of England intervening in the bond market and postponing impending bond sales or reduction of their balance sheet.
The other major intervention in financial markets was in Japan with their Ministry of Finance, Shunichi Suzuki, buying Japanese Yen to stem currency weakness. This intervention from monetary authorities poses the question that the rapid tightening of financial conditions from the front loading of rate hikes is continuing to present problems within the financial system and creating volatility that might encourage Central Banks to slow down or pivot away from their hiking program.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/6347a0b86f2a3ba902678ec7_CC-JCB-Global-Bond-Fund-Unhedged-Monthly-Report-September-2022.pdfAugust, 2022
For the month ending August, the CC JCB Global Bond Fund – Hedged Class returned -2.76% (after fees), underperforming the Bloomberg Global G7 Total Return Index Value Hedged AUD. The portfolio underperformed slightly for the month of August in a challenging month for global bonds, as the narrative remained clouded with the spectre of a slowing economy against tightening of financial conditions as central banks reinforced their commitment to return inflation to mandated levels. The portfolio commenced the month with an underweight position in US Treasuries, Japan and UK which maintained an underweight bias in peripheral Europe focused on Italy. Early in the month US-China tensions flared briefly following the visit by US Congresswoman Nancy Pelosi to Taiwan, although those geopolitical concerns dissipated shortly after. As US yields pushed higher early in the month following a strong US employment report which was close to double expectations and resulted in more aggressive pricing of monetary tightening for the September Federal Reserve meeting. US Fed Governor Powell struck a hawkish tone at the annual Jackson Hole Economic Policy Symposium - underscoring that achieving their inflation mandate would likely require a restrictive monetary policy stance “for some time” and that prior cycles “cautions strongly against prematurely loosening policy”. The market continued to focus on the European energy crisis with higher energy prices and slowing economic data forcing the EUR/USD back under parity, with the European Central Bank dialogue pointing to a potential 75 basis point rate hike at the September 8th meeting. The portfolio will look to take advantage of a back up in shorter term, as US yields provide an opportunity to increase exposure in that part of the yield curve.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/632165d399b79f2fbc8893a7_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-August-2022.pdfJuly, 2022
For the month ending July, the CC JCB Global Bond Fund – Hedged Class returned 1.90% (after fees), underperforming the Bloomberg Global G7 Total Return Index Value Hedged AUD.
The global rates rally carried on in early July, with better-than-expected US labor data and further increases of inflation leading to a rate selloff till mid-July. Across the Atlantic, markets worried about the total cut off of Nord Stream, which would have dragged the Germany economy into recession straight away. Once the European Central Bank hiked 50 basis points, the Philadelphia Federal Index survey plunged to -12.3,as rate markets rallied aggressively. Markets expected the economy slowdown to cool inflation quickly and the US Federal Reserve would pivot to cut policy rates in early 2023. Over the month,the yield curve flattened aggressively. As US 2-year vs 10-year yield spread flattened by 29 basis points (bp) and touched -32 bp intra-month. Last time that we saw such an inverted yield curve was in March 2000, the peak of the dot-com bubble.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/62f606c1ed71fd3ae0affcc1_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-July-2022.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
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/62d753e042cb6a51eb588452_CC-JCB-Active-Bond-Fund-Monthly-Report-June-2022-1.pdfMay, 2022
For the month ending May, the CC JCB Global Bond Fund – Hedged Class returned -0.35% (after fees), outperforming the Bloomberg Global G7 Total Return Index Value Hedged AUD.
The global rates market showed divergent paths in May. With US Treasuries (UST) 10Y yield lowered by 9 basis points (bp) on a monthly basis. The monthly decline masked the volatility as UST 10Y yield, was under consistent selling pressure since March, reaching 3.20% in early May - just shy of 2018 peak. After that, it fell 50bps to 2.70% in less than 2 weeks. Investors feared that US economy was cooling faster than expected while the US Federal Reserve (US Fed) continued tightening the monetary policy to bring inflation back to its 2% target. Across the Atlantic, Bund 10Y yield and Gilt 10Y yield were up 18bps and 20bps over the period respectively. Inflation data in these regions reached record highs and expected to move higher in coming months.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/62a7cb71a5bdb508dbb3e8ce_CC-JCB-Global-Bond-Fund-Hedged-Class-Monthly-Report-May-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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/627d9ed4e5a52749235aeefd_JCBABF_A_202204.pdfMarch, 2022
For the month ending March, the CC JCB Active Bond Fund - Class A units (the Fund) returned -4.16% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. The selloff in global bond markets accelerated in the month of March to reach higher yield levels not seen since the previous U.S Fed hiking cycle of 2018.
Three core themes have continued to dominate markets:
- higher inflation in terms of both realised inflation and forward looking expectations.
- increasingly hawkish Central Bank policy and;
- geopolitical risks.
Global supply chain issues, as well as pent up demand has seen inflation continue to move higher in developed markets, with the U.S Consumer Price Index data showing an annual rate of 7.9%. The U.S Federal Reserve officially kicked off their rate hiking cycle with a 25 basis point hike at the March Federal Open Market Committee (FOMC) meeting. Jamieson Coote Bonds has long been of the view that the U.S Federal Reserve have been behind the curve in their tightening cycle and had seen a 50 basis point hike as a good opportunity to send a strong message to the market of their intentions to dampen inflation. A more conservative path was chosen by the FOMC as the uncertainty reigned strong with the Russian invasion of Ukraine. Markets are now almost fully priced for 50 basis point interest rate hikes by the U.S Fed at the next meeting in May, with a terminal price of around 2.75% priced into markets, before an economic slowdown will see rate cuts in the second half of 2023. The aggressive pricing saw the U.S bond curve flatten. In the front end of the U.S bond curve, 2y United State Treasuries (UST) sell off 90 basis points for the month to finish at 2.33%, while 10y USTs sold off 51 basis points to 2.34%. Historically, curve flattening is a consistent predictor of pending recessions over the next 18-24 months.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/62561e475d21e5df91c7ce1f_CC-JCB-Active-Bond-Fund-Monthly-Report-March-2022-1.pdfFebruary, 2022
For the month ending February, the CC JCB Active Bond Fund - Class A units (the Fund) returned -1.39% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. The volatility in global financial markets that was exhibited since the turn of the year continued in February.
In a month of two halves, bond markets sold off to higher yields in the first half of the month as inflation data continued to print at uncomfortably high levels, before escalation of geopolitical tensions between Russia and Ukraine came to a head on 24th February, when Russia launched an invasion. The peak yield in the U.S 10 year Treasuries for the month was 2.04% (highest level since July 2019), before finishing the month at 1.825%. In the U.S, Headline Consumer Price Index rose by a very strong 0.64% month on month (MoM) and 7.5% Year on Year (YoY), the strongest annual increase since February 1982. Both food and energy prices were stronger than expected, both rising by 0.9% MoM. The price of oil finished the month 8.6% higher.
Adding to the inflationary impulse was the Russian invasion of Ukraine, both producers of large amounts of commodities. The fear of a broader global war has caused risk markets to sell off globally, with equity markets and credit markets hit particularly hard. Australian equity markets outperformed their offshore counterparts. Bond markets performed very well in this environment with long end bonds pricing in lower global growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/622acd7740f965ab27efb554_JCBABF_A_202202.pdfSeptember, 2021
For the month ending September, the CC JCB Global Bond Fund – Unhedged Class returned 0.11% (after fees), outperforming the Bloomberg Global G7 Total Return Index Value Hedged USD (converted to AUD). The global bond market was pulled and pushed by the heavy bond issuance schedule, concerns of the Evergrande default and China’s economy slowing down in the early part of September. During this period, UST 10Y yield traded within a confined range between 1.27% and 1.38%. The FOMC meeting was largely consistent with the market expectation that tapering would start later this year. Chairman Powell provided more details suggesting that “could come as soon as the next meeting” and be completed by mid-2022. The hawkish surprising from Bank of England meeting and high energy price in the EU, UK and China, pushed the yield to break its recent range. Over the month , UST 10Y yield was up 18bps, Gilt 10Y yield was up 31bps while ACGB 10Y yield was up 34bps.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/61667d8e7bf949637a76282e_JCBGBU_202109.pdfAugust, 2021
For the month ending August, the CC JCB Global Bond Fund – Unhedged Class returned 0.29% (after fees), underperforming the Bloomberg Global G7 Total Return Index Value Hedged USD (converted to AUD). Global bond market reversed from the recent bullish trend as the fear of economy slowdown was likely priced in . UST 10Y yield reached the bottom at 1.12% in early August and closed the month at 1.31%. Germany, France and Italy 10Y yields, which were largely stable in the first half of the month, joined the selloff lately as ECB speakers hint the potential reduction of PEPP purchase in the coming ECB meeting. Despite the continuous spread of the Delta variant, signs of peak of the current wave emerged in developed countries. Inflation also maintained at high level with prolonged supply chain bottleneck.
The Underlying Fund added a steepening trade in Germany bund curve as it became too flat compared to global peers and the flatness cannot be justified by the Germany macro outlook. The Underlying Fund also added a short UST belly trade which would benefit from US Fed tapering. Overall, for the month, the Underlying Fund benefited from the flattening-bias in the UST, which was unwound ahead of Jackson Hole meeting, while dragged by the yield spread widening among European countries
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/614051003dc51716e24f7fc5_JCBGBU_202108.pdfDecember, 2020
For the quarter ending December, the CC JCB Global Bond Fund – Unhedged Class returned -7.06 % (after fees), underperforming the Barclays Global G7 Total Return Index Value Hedged USD (converted to AUD). In December, Gilt outperformed G7 peers as Brexit uncertainty and the new Covid19 strain found in England led to safe haven buying. On the other hand, US Treasury underperformed on the optimism of Pfizer -BioTNTech and Moderna vaccine and the US Congress passing the new fiscal stimulus.
German bund was caught between the re-emerging of infect cases and vaccine/fiscal headlines, ending the month flat. Supported by the ECB’s accommodative monetary policy and favourable net cash requirement outlook in 2021, Italian yield spreads to the German bund tightened almost 9 basis points to 111 basis points. The Underlying Fund benefited from the underweight in US Treasury. Meanwhile, the short duration in the Italian market dragged the performance. The results of Georgia’s senate runoffs on 5 January 2021 will decide whether Democrats could control both the US Congress and White House in the next two years.
If this happens, it could have a profound impact on the fiscal policy. The Unhedged class (USD converted to AUD) lost -4.54% from the currency movement (being unhedged), while the bonds added a little (0.17%) to the performance, with the AUD/USD strengthening around 4.75% in December.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/5ffe94ea982cb5f126c0d7e6_JCBGBU_202012.pdfticker: CHN1425AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.channelcapital.com.au/resources-fund-documents
Lower mid -> CC JCB Global Bond Fund (unhedged) -> September 2022
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Global
peer_benchmark: Fixed Income - Bonds - Global Index
broad_market_index: Global Aggregate Hdg Index
structure: Managed Fund
fund_features:
CC JCB Global Bond B Unhedged aims to outperform the Bloomberg Barclays Global G7 Total Return Index Value Hedged in USD converted to AUD and with better risk-adjusted returns (after fees) on a rolling three-year basis. 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.