September, 2023
For the month ending September, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.22% (after fees), underperforming the RBA Cash Rate Total Return 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 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.
Curves steepened through the month as the issuance profile and inflation expectations continued to put pressure on the longer end of the yield curve along with the diminishing buying from international Central Banks. The aggressive rally in oil through the month following Saudi Arabia and Russia’s commitments to persist with productions cuts through until December 2023 was the contributory factor to the 9% gain in the energy complex. The higher energy prices stoked fears the current period of stalling inflation would end and make it hard for the Central Banks to keep it under control, although ultimately it is a consumption tax and a drag on growth.
The portfolio got wrong footed mid-month with the breach of the 4.35% level in US 10- year Treasury yields, the 2022 highs, which was an area that we felt was compelling to add duration in US Treasuries . The momentum through there was exacerbated by the momentum participants and the continued rise in term premium following the Fed meeting and as the market became more comfortable that rates could remain higher for longer. Into month end the fund added some long end UK bonds as their economy continued to show signs of slowing and as the BoE come close to finishing their hiking cycle. Into month end the portfolio continued to hold short end bonds in NZ and Australia with the view that these bonds should outperform on the curve .
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6526048ba6b19a076153e96f_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-September-2023.pdfAugust, 2023
For the month ending August, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.54% (after fees), outperforming the RBA Cash Rate Total Return Index.
The month commenced with a Fitch downgrade of the US Long Term rating from AAA to AA+ which assisted the move higher in yields for the start of the month, only then to reverse on weaker than expected US employment data .
Mid-month, Treasuries continued their move higher in yields on the news of greater supply and foreign central bank selling which allowed the market to reach levels not seen since November 2007 – with the US 10-year touching 4.34% on August 21. The much anticipated speech from the US Federal Reserve Chairman Powell at the Jackson Hole conference was uneventful, however the market responded favourably latching on to his encouraging comments on inflation data. Across the pond in the UK, the yields pushed higher following record high wage growth data although subsequently recorded very weak retail sales data which demonstrated that the transmission mechanism of tightening policy was starting to weave its way through the system. European data continued to deteriorate with much weaker than expected manufacturing data as the China slowdown continued to bite .
Domestically the Reserve Bank of Australia (RBA) kept rates unchanged, and the market started to get comfortable with the fact that the end of the tightening cycle is nigh as data continued to show signs of weakness with falling employment and softer wages data. Australian market continued to outperform its global peers as the Chinese slowdown, higher debt-loads and more favourable supply picture all supported the market. The Fund continued to hold high quality short end Australian and New Zealand paper as we approach the end of the rate cycle in both countries. Through the month the fund engaged in US Treasury long end steepening position, unwound a short dated Treasury curve steepener and trimmed some UK bonds.
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.
The Antipodean Central Banks, the RBA and RBNZ have already strongly hinted that they are at the end of their respective hiking cycles which is telling and reflective for other global central banks as these economies are both highly levered and susceptible to weakening global growth outcomes. New Zealand is already in official recession , albeit mild but with no policy support forthcoming, we expect this will continue to broaden to a more severe slowdown. Australia is now in a ‘per capita’ recession, as GDP per person was -0.3% in both the March and June quarters, meaning it is only population growth that is keeping the nominal numbers above zero. Historically the probability is high that rate hikes presage floundering economies and given the velocity of this rate hike cycle, the chances of a hard landing should supersede chances of a unicorn soft landing. The benefits of duration is compelling, particularly as the bond market traditionally rallies after the last hike and given the bifurcated nature of this business cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6507d50d980509aa19d47a62_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-August-2023.pdfJuly, 2023
For the month ending July, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.43% (after fees), outperforming the RBA Cash Rate Total Return Index.
Global bond markets commenced the first week of the month under pressure after an outsized US employment print landed into the US Fourth of July holiday effected week. This forced US 10-year yields through the 4.00% level which had not been seen since the regional banking crisis in March, the markets also had to digest the minutes from the US Federal Reserve’s (US Fed) June meeting which despite them remaining on hold at that meeting they called for further rate hikes this year. The UK bond market continued to provide direction for its global peers and early in the month UK 10-year yields hit their highest levels since 2008 with market expectations of a 6.5% peak in the Bank of England’s short-term rate by year end. Global bond market yields peaked early in month with lower-than-expected US CPI inflation as it declined from 4.0% to 3.0% in June which along with the lower-than-expected Producer Price Index number added to the disinflation narrative. The stabilisation of short end rates in line with the thematic of Central Banks at the zenith of their tightening was supported by the Reserve Bank of New Zealand maintaining their bank rate at 5.5% and the Reserve Bank of Australia (RBA) remaining on hold and deleting a reference to “upside risks to the inflation outlook”. The Bank of Canada, US Federal Reserve and the European Central Bank (ECB) all moved in line with market expectations and hiked by 25 basis points. Bond markets peaked mid-month following the downside surprise in UK headline CPI which was the first miss in inflation since January, however the market failed to sustain the rally. The foundation for a steepening of the yield curve commenced with a strong rejection of the 5.00% level in US 2 years which encouraged demand for short end bonds, and this was supported by less hawkish rhetoric from Central Bank officials. Noted by ECB hawk Klaas Knot commented after the July hike from the ECB that ‘for anything beyond July it would at most be a possibility but by no means a certainty”. Into month end Bank of Japan surprised the market as they tinkered their yield curve control program which also pressured markets into month end with the spectre of a Japanese liquidation of foreign bonds in the foreseeable future. The strong performance of the energy complex on output reduction plans from Saudia Arabia and Russia also pressured fixed income through the month. Domestically the RBA kept rates on hold at the start of the month, however deleted the reference to “upside risks to the inflation outlook” in its statement. Data was a mixed bag for the month with the stronger employment data somewhat offset by the weaker CPI and retail sales prints. Australian bonds underperformed Treasuries to start the month amid the global sell -off, however grinded tighter through the month on softer than expected data.
The portfolio added shorter dated tenors to the portfolio throughout the month specifically New Zealand and Australian Supra paper which offered attractive yields for the minimal risk. US Treasuries were added on the cheapening at the commencement of the month and subsequently unwound following the weaker than expected US CPI data. The fund bought UK bonds which was held against an underweight in Germany in anticipation that the higher short term rates in the UK, given their fluid mortgage transmission system would continue to impact the growth outlook and slowdown inflation. The fund will continue to add shorter term fixed income product in the foreseeable future as we near the end of the global tightening cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/64dafddbb06eaabaa7b15aaf_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-July-2023.pdfJune, 2023
For the month ending June, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.12% (after fees), underperforming the RBA Cash Rate Total Return Index.
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 failed to materialise. Sovereign bonds struggled to perform as inflation remained sticky and central banks remained on the front foot with their hawkish actions. The nuances of the inflation stickiness are important as goods inflation is decelerating however services inflation remains firm as a result of pent-up consumer demand. Canadian and Australian central banks both surprised the markets early in the month as they lifted their cash rates by 25 basis points (bp) to 4.75% and 4.10% respectively. The Bank of Canada’s decision was telling as they had issued a conditional pause in January however resumed the tightening phase on concerns that core inflation momentum might prevent inflation from hitting its 2% target. The Reserve Bank of Australia’s rate hike, the revision to national minimum wages and surprisingly robust employment data pressured the market into month end although momentum stalled into the compelling 4.00% region as the June Board meeting minutes highlighted policymakers had contemplated a pause and CPI came in much weaker than expected. Elsewhere Bank of England committed to a 50 bp hike and the European Central Bank a 25 bp hike however the market had pretty much already priced those decisions in. Bank of Japan (BoJ) continued to frustrate market participants who are positioning for an end to their current yield curve control as BoJ Governor Ueda stuck to his guns and suggested there was no need to tweak the policy. The US Federal Reserve (US Fed) left their policy rate unchanged although offset that with their dot plot which posited two more rate hikes into year end. Governor Powell reiterated at Sintra on June 28th that the US Fed was still committed to consecutive rate hikes.
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 Sicilon Valley Bank 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.
JCB believes 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 portfolio encountered drag from the underperfomance of the Australian short end and fixed income in general through the month. Portfolio still remains positioned for a change in Japanese Yield Curve Control, holds some UK gilts against Bunds and initiated a steepening trade in US Treasuries , buying the 2 year against the 5 year.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/64b08a3393e0eb01bf6e9ded_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-June-2023.pdfMay, 2023
For the month ending May, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.13% (after fees), underperforming the RBA Cash Rate Total Return Index.
The portfolio endured a slight underperformance in what continued to be a challenging period for the markets as the banking sector continued to remain in the spotlight early on against the narrative of “sticky “ inflation which provided a cloudy picture for the global central banks.The bond market tested resistance levels early in the month that had held all year and again sellers appeared, the 3.30% region in US 10 years failed to crack despite repeated attempts. Bonds were also provided with an early bid in May after the US Federal Reserve meeting where they hiked 25 basis points (bp) to 5.25% however bulls latched onto the omission of prior communication signalling future hikes – specifically the committee removed the comment that “some additional policy firming may be appropriate”. Bond markets then proceeded to grind lower through the month as the narrative switched away from a turn in the hiking cycle to focus on the “stickiness” of inflation. Persistent debt ceiling negotiations kept markets on tenterhooks and resulted in Fitch placing the US on watch for a downgrade. Similar to the previous month, the UK delivered an upside inflation surprise which escalated selling in the UK and provided global bond markets with a reminder that the fight against inflation at the expense of growth may still be warranted .Domestically, Australian bonds were pushed lower through the month as the Reserve Bank of Australia surprised the market with a 25 bp hike which set the tone. The monthly CPI indicator was a bit hotter than expected which in conjunction with US and UK inflation numbers pressured the market. Weaker Chinese data and a dovish hike from Reserve Bank of New Zealand failed to elicit much support for the domestic market as the systematic managed futures community took control and pushed momentum lower. The Fund suffered a drag on performance from the weakness in Australian short end however ultimately JCB believes that the economy will collapse quickly and that central banks will have to pause their path of tightening policy imminently which should allow a decent performance in the high grade fixed income landscape.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6489472e513fd3f97cdbfbb8_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-May-2023.pdfApril, 2023
For the month ending April, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.50% (after fees), outperforming the RBA Cash Rate Total Return Index.
The Fund enjoyed another good month as volatility for the month was somewhat subdued mainly at the behest of data releases and remained within a narrow range. Lingering concerns around the debt ceilings and the US banking system kept the market supported. In the US, an early month bond rally was curtailed following a strong jobs report on Good Friday which reignited expectations of a 25 basis point hike in May from the US Federal Reserve. Into month end the frailities of the banking system were highlighted as the FDIC had to takeover First Republiuc which assisted the month end buying. The main event on the Central Bank calendar for the month was the Bank of Japan and the new Governor Kazuo Ueda disappointed the market who were looking for a change to the long standing expansionary policy that was initiated in 1995. Bank of Japan kept policy settings on hold and informed the market that they were conducting an indepth review of their policies which could take up to 18 months. Bonds markets incurred a hiccup through the month with a higher than expected UK CPI print that put pressure on the inflation slowdown narrative and forced global bond markets into their lows for the month. Domestically the Reserve Bank of Australia kept policy unchanged at 3.60% and also enjoyed a lower than expected CPI print which kept the market relatively well supported through the month. Australia issued a new December 2034 Bond with a size of 14 billion which was well received with 61 billion of bids at the final clearing price. The surprise announcement at the start of the month from OPEC of production cuts in oil triggered a sharp rally in energy however the market failed to sustain the strength as crude traded lower for the majority of the month as the focus switched to a slowdown in economic growth,
The Fund reduced its duration early in the month taking off some 7 yr New Zealand Bonds and Queensland Treasury Bonds into decent strength as the market liquidity was expected to diminish over the holiday period and into the important US employment report. The portfolio participated in the issue of the Australian 2034 government bond which came in at the global bond market lows and also added to short end duration – specifically the Australian 3yr bond - around the issue given the tendency for the market to rally out of decent supply issues. Into month end the portfolio reduced some more of its core New Zealand holding and added some German longer end exposure.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/645de73c8cdc70b6bf74327b_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-April-2023.pdfMarch, 2023
For the month ending March, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.73% (after fees), outperforming the RBA Cash Rate Total Return Index.
The month of March was another historic period of volatility as the rapid tightening of the financial system over the last year exposed the fragilities of the banking system.
The stress in the banking sector dramatically altered Global Central Banks guidance as the outlook flipped from a ‘higher-for-longer” consensus view to one that includes the US Federal Reserve (US Fed) cutting rates in 2023 as the base case. This resulted in an aggressive rally in US 2 year notes which peaked at 5.08% early in the month and troughed at 3.76% on the 24th of March. In the US, markets initially focused on the hawkish commitment from the US Fed after the US Federal Reserve Chair, Jerome Powell’s testimony indicated higher rates for longer. Shortly after those comments, the collapse of SVB and other regional banking stresses within the US triggered a rapid recalibration of future rate hikes as concerns over credit creation and the economic outlook escalated. This banking fragility also spread to Europe where Credit Suisse was balied out with the acquisition by UBS which was orchestrated by the Swiss authorities on March 19. The deal caused stress in the corporate bond market and triggered a flight to quality into highly-rated government bonds and concerns of who the next banking victim would be.
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.
The Fund over the month of March held long positions in short end Australian spread product in anticipation of continued performance and carry as the Australian economy continues to slow as the long and viable lags of monetary policy effect the economy. Dynamic Alpha also maintained a long position in short dated US Treasuries against a small short position in Japanese rates, with some additional curve flattening exposure in the 10 year to 30 year tenors in expectation of a sell off and flattening of the term structure within the removal of Yield Curve Control by the Bank of Japan.
Over the month, the Fund added a large position in 7 year New Zealand Government bonds, which were being syndicated with significant concessions to other cross market relationships and were compelling given that Reserve Bank of New Zealand are nearing the end of their tightening cycle. This duration risk was partially controlled by offsetting the position against Australian 10 years futures and US Treasuries. The portfolio also added QTC green 10 years bonds at new issue hedged with 10 yrs futures.
The explosion of Silicon Valley Bank initially saw these structures underperform, whilst staying within our expected volatilities. As the situation evolved this provided JCB to manage the risk down over the month and monetise the opportunities whilst reducing risk. JCB expects volatility to remain elevated and have calibrated risk accordingly.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/643f54f6e188aa0a669f6bc5_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-March-2023.pdfFebruary, 2023
For the month ending February, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.11% (after fees), underperforming the RBA Cash Rate Total Return Index.
The Fund encountered a challenging month as global short end bonds were all re -priced lower as the economic data from the Northern Hemisphere exceeded expectations. Global yields bottomed at the start of the month following the US Federal Reserve (US fed) meeting which provided a 25 basis point (bp) hike and also pointed to a continuation of rate hikes on the horizon. The tone for impressive US economic data through the month was set early as nonfarm payrolls came in much stronger than expected (517k v 189k) on 3rd February.Through the month we also received decent retail sales and a couple of hot inflation data points , CPI and the Fed’s preferred PCE deflator both encouraged calls for a 50 bp hike in March. US 2 year yields increased 62 bps over the month to close at 4.82% as markets expectation for the Fed Funds rate to finish at 5.50% for this hiking cycle. In the aftermath of the stronger US economic data prints, albeit helped by the better than expected weather for the Northern Hemisphere , US Fed officials including US Fed Chairman, Jerome Powell communicated the narrative of a potential “higher for longer” tightening cycle. In Europe, rates rallied aggressively following the ECB meeting where short term rates were increased by 50 bp. German 10 year yields richened 20bps on the day - which was their largest daily decline since November 2011. Markets interpreted that after March they would “then evaluate the subsequent path of its monetary policy.” Markets then tracked US bond markets lower into month end and stronger than expected inflation data out of France and Spain into month end triggered a sharp sell -off and resulted in money markets pricing in a 4% ECB peak rate. In Japan the new nominee for Bank of Japan Governor, Kazuo Ueda , fronted parliament and mentioned a potential switching of the Yield Curve Control (YCC) band maturity from the 10 year to the 5 year part of the bond curve. Domestically , Australia remained the outlier as domestic data soured under the weight of consistent tightening from the RBA as the unemployment rate turned higher to 3.7% and wages came in lower than expected,along with a softer GDP print which allowed the Australian bond market to outperform through the month.The fund benefitted from the domestic outperformance in bonds through the month however the drag on performance resulted from offshore holdings. The fund lifted its domestic ESG holdings through the month participating in the Asian Development Bank 2026 Gender Bond.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6410f49ed005175984b34c4c_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-February-2023.pdfJanuary, 2023
For the month ending January, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.30% (after fees), outperforming the RBA Cash Rate Total Return Index.
The fund delivered modest returns for the month of January as financial asset markets started the year off in a different fashion to 2022. Global bond volatility continued to dissipate which allowed investors more surety that the rapid tightening of financial conditions experienced last year is mostly behind us. Treasury yields pushed lower reflecting the growth-slowdown narrative in the US economy as a slowdown in inflation and economic data outweighed the comments from Fed officials who continued to stress that short end interest rates would remain higher for longer. The US employment report beat expectations on the headline number however the softening in the average hourly earnings garnered more attention as the market focused on the deceleration of the inflation narrative. US CPI also came in line with expectations which placated the market and supported the bullish environment for equities and financial assets. 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 . Following the surprise move by the Bank of Japan to widen the YCC bands at their December meeting the market eagerly awaited the outcome of their January meeting given the negative implications for the global bond market if they continued with their hawkish behaviour. The positioning reflected a strong bias for higher Japanese yields and the failure of the BoJ to move the YCC bands instigated a sharp rally in Japanese bonds that also also supported global bonds to a lesser extent. 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 signalled a shift to a “conditional pause”. Domestically the Australian bond market enjoyed a strong rally to start the year after the bludgeoning into year end on the news of China reopening and the move from the bank of Japan – the cheapness encouraged good demand again off the 4.00% level in 10yr bonds and ironically the market pushed to new highs for the month following the decision by the Bank of Japan to keep the YCC band unchaged at +/- 50 bp. The market retreated following a higher CPI which came in at 7.8% versus expectations of 7.6%. The portfolio benefited through the month from Australian rates outperformance adding to duration around the 4.00% level in Australian 10yr bonds and tactical duration plays in US Treasuries and European rates.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/63eaf9cc1b1395084cd8f0ca_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-January-2023.pdfDecember, 2022
For the month ending December, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.10% (after fees), underperforming the RBA Cash Rate Total Return Index.
The main thematics in the month of December 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. The portfolio will have a preference to remain underweight Europe and a bias to explore global curve steepening trades to start the year.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/63c49cbafb52200fce27b1e3_JCBDAF_A_202212.pdfNovember, 2022
For the month ending November, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.41% (after fees), outperforming the RBA Cash Rate Total Return Index.
The Fund completed another respectable month as November witnessed a change in sentiment amongst developed bond markets following a decent downside miss in the US CPI and a more dovish dialogue amongst the Central Bank community. The US Federal Reserve (US Fed) lead the charge with a bias towards a reduction in the velocity of rate hikes 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”. The markets narrative started to focus on the heightened chances of a global economic slowdown in 2023 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 unabated through November, including the 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. The weakness in oil prices throughout the month despite a tightening supply outlook was predicated on the concerns of the global economic slowdown and also supported bond prices. The Fund benefited from Australian bond short end outperformance and tactical duration investments through the month. Detractive for performance was a short European exposure which is expected to perform into year end following the December European Central Bank meeting and as the energy crisis re-emerges into winter with both events expected to put pressure on European bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6398f5a24a44534e8f993618_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-November-2022.pdfOctober, 2022
For the month ending October, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.30% (after fees), outperforming the RBA Cash Rate Total Return Index.
The portfolio returned a positive month and continued to display solid defensive characteristics in the face of a volatile month for all asset classes. Yields in US Treasuries peaked in the middle of the month at 4.61% and 4.24% respectively for the 2 yr and 10yr bonds as selling momentum persisted given the stronger than expected employment data and rise in inflation expectations as a result of the Organisation of Petroleum Exporting Countries (OPEC) cuts forcing crude oil higher. Bonds rallied into month end following an article in the Wall Street Journal , from a journalist considered well informed on the US Federal Reserve’s movements, reporting that “some officials have begun signalling their desire both to slow down the pace of increases soon and to stop raising rates early next year” (WSJ, 21 October 2022). The Bank of Canada added to the speculation of a slowdown in the global tightening phase as they decided to only hike rates by 50 basis points (bps) rather than the consensus forecast of 75 bps. The European Central Bank also hiked rates into month end however some dovish overtures were demonstrated with minor tweaks to the statement alluding to a slowdown in the pace of interest rate rises. These subtle changes from global central banks encouraged market participants to envisage a potential change in the rate of monetary tightening that has plagued global economies for the last year.
The UK market dominated headlines again for the month as the political maelstrom persisted with extreme volatility seen across the fixed income market early in the month. By mid-month the new UK chancellor Jeremy Hunt reversed the fiscal plan and then the election of Rishi Sunak as Prime Minister stabilised the UK Gilt markets and allowed them to rally into month end. Stability in the UK market was supportive for the global bond markets and reduced bond volatility into month end which was demonstrated with the correction in the bond volatility MOVE index that corrected approximately 13% from its 2022 highs set on October 12th. Domestically the portfolio benefited from the unexpected decision from the Reserve Bank of Australia to only raise rates by 25 bps against the market consensus of 50 bps, which supported the Australian short end and triggered a sharp bounce. JCB remains of the view that the lagged effects of monetary tightening will start to feed into the economy as we head into 2023 and that the ability of central banks to complete a soft landing will be very challenging.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/63730c3b5545b444a8094fa7_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-October-2022.pdfSeptember, 2022
For the month ending September, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.08% (after fees), underperforming the RBA Cash Rate Total Return Index.
The portfolio was challenged for the month as global bond markets remained under pressure along with other asset classes. With the 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 and Central Bank actions 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. The fund encountered a drag on performance from the move lower in Australian short end bonds which tracked offshore bond markets, despite Reserve Bank of Australia Governor, Phillip Lowe , swimming against the hawkish global Central Bank tide at the annual Anika Foundation address, this suggested that the “case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”. The portfolio remains positioned for outperformance in the Australian bond markets against its peers given the different inflation pathway and higher household debt loads exhibited domestically. The portfolio also added short term paper in the US given the compelling yields and with the expectation that the window for the peak in short end yields is approaching.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/63479a85b77cb74ed67579f8_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-September-2022.pdfAugust, 2022
For the month ending August, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.20% (after fees), outperforming the RBA Cash Rate Total Return Index.
The portfolio completed a decent return amidst the challenging month for asset markets in August. The month started with a potential geopolitical scare as US-China tensions flared briefly following the visit by US Congresswoman Nancy Pelosi to Taiwan which provided a brief flight to quality bid in the government bond market although this dissipated. As US yields pushed higher early in the month following a strong US employment report, which was close to double expectations and resulted in a more aggressive pricing of monetary tightening for the September Federal Reserve meeting. The push to higher yields was tempered as headline inflation in the US came in weaker than expected as weaker energy prices started to transmit through the economy. Hawkish messaging from various US Fed members throughout the month reiterated their commitment to raise rates to quash inflation which took the tailwind out of asset markets that were reinvigorated by US Fed Powell’s dovish comments in late July. With global yields drifting higher into month end as the market continued to deliberate over the European energy crisis, Central Bank tightening continued to persist amidst the backdrop of deteriorating global economic data. The portfolio traded with an underweight bias in US Treasuries for most of the month and continued to express an underweight in the European markets in anticipation of the inflation skew remaining higher given the energy crisis.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/63217e9d047282cdc155cd9e_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-August-2022.pdfJuly, 2022
For the month ending July, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.39% (after fees), outperforming the RBA Cash Rate Total Return Index.
The Fund enjoyed a decent month as bonds enjoyed one of their best monthly performances in history. The month started with a strong US CPI data release for June – registering 9.1% year on year - which bolstered calls for a possible 100 basis point hike by the US Federal Reserve. With equity markets tumbling and the growing narrative around a global recession also triggered demand for bonds as Central Banks continued to hike around the globe and tighten financial conditions, with Reserve Bank of Australia hiking 50 basis points (bp) to 1.35% ,Bank of Canada 100 bp to 2.50% and Reserve Bank of New Zealand 50 bp to 2.50%. The straw to break the camel’s back from a Central Bank hiking perspective appeared to be the 50 bp hike from the European Central Bank with global bond markets rallying aggressively into month end following that decision as the market started to focus on the growth slowdown story because of the co-ordinated global rate hikes. The markets also positioned for the August window where bond markets traditionally perform well. Augmenting the positive bond sentiment was the deterioration in the US economic data which includes various regional manufacturing surveys and softer housing data – which saw US 10-year yields move from 3.07% on July 21 to close out the month at 2.69%. US Federal Reserve Governor, Jerome Powell, at the US Federal Reserve meeting emphasised that further rate hikes would be data dependent as policy would be set on a meeting-by-meeting basis and that rates were close to a neutral or fair setting. This quasi pivot in US Federal Reserve monetary policy thinking could be worse than expected as the US GDP reading (-0.9% v 0.4% expected) took yields out on their lows for the month. The Fund continued to benefit from the compelling yields on offer which was managed in a strict risk -adjusted framework.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/62f607539a7144de01bfc46d_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-July-2022.pdfJune, 2022
After leading macro markets for much of the year, Government Bond markets initially underperformed significantly early in the month of June, before stabilising and then performing (rallying 3.3% from the monthly lows) into month end. This showed increased negative correlation to risk assets as the inflation narratives gave way to worries around economic growth. We believe the recent performance of Government Bonds also speaks to concerns around credit risk, as it becomes clear that a new credit default cycle will emerge from higher funding and refunding pressures within the financial system. Performance of all listed asset classes continues to remain highly volatile , with ongoing uncertainty around the actual requirements of policy tightening to deliver lower inflation outcomes for economies.
Collectively, Central Banks have spent the majority of their time since the Global Financial Crisis of 2008 encouraging a misallocation of capital to avoid a disinflationary low growth /recession under a secular environment that has been prone to delivering low inflation and weak growth outcomes. Keeping the system juiced up with accommodation, low rates, quantitative easing and giving investors little choice (TINA = there is no alternative) has forced portfolios to drift into riskier allocations by decree. In 2022, it seems Central Bankers are actively seeking exactly the outcome they have worked tirelessly and spent trillions of dollars trying to avoid – a disinflationary or deflationary recession to bring post Covid-19 economic volatilities and geopolitical influences to heal.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/62d8ad4e076074aaed78ade3_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-June-2022.pdfMay, 2022
For the month ending May, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.52% (after fees), outperforming the RBA Cash Rate Total Return Index.
At the US Federal Reserve (US Fed) meeting on May 4, the US Fed hiked rates by 50 basis points (bp), however they pushed back on the option of going 75 bp. US Fed Chairman Powell opined that “inflation is far too high” and there seemed to be agreement among the committee that similar sized rate increases “should be on the table for the next couple of meetings”. With equity market weakness and a general downturn in risk sentiment, allowed US 10-year yields to stabilise around the 3% zone and the tightening of financial conditions impacted risk markets which was corroborated with a slowdown in economic data. The general tone from US Fed speakers through the month continued the thematic of pursuing tighter policy however there was a subtle shift in the hawkish narrative from US Fed Bostic on May 23 when he commented that “a pause in September might make sense” – this helped support risk markets and allowed some respite from the selling pressure of fixed income in 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/62a7cc2ad3553110ddd99ee1_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-May-2022.pdfApril, 2022
For the month ending April, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.37% (after fees), underperforming the RBA Cash Rate Total Return Index.
Global Bond markets suffered more pain in April as cross asset volatility remained persistent. The strong pressure from US Fed officials persisted with calls for 50 basis points (bp) for the May meeting and a higher neutral rate, with US Fed Bullard being quite vocal in calling for a 75 bp first hike. Bank Of Canada hiked 50 bp to 1% and suggested further 50 bp hikes were possible, Reserve Bank of New Zealand also hiked by 50 bp to 1.5% although countered that with the messaging “larger moves now” generate more “policy flexibility ahead”. The European Central Bank even joined in on the hawkish behaviour as they communicated that a July rate hike is possible. The US, Canada and Australia all recorded stronger than expected inflation data which exacerbated the bearish sentiment in bonds . Despite this tightening bias, Bank of Japan swam against the Central Bank tide as they held rates steady and defended their Yield Curve Control policy pledging unlimited purchases of Japanese Government Bonds every day which could trigger a sharp move lower in Yen.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/627da0944827842e540d0fef_JCBDAF_A_202204.pdfMarch, 2022
For the month ending March, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.55% (after fees), underperforming the RBA Cash Rate Total Return Index.
The ides of March were applicable for the bond market which rounded out a challenging quarter for bond investors, which also coincided with the end of the Japanese fiscal year and the subsequent reduction of fixed income assets. An acceleration of the sell-off through the month pushed yields to levels not witnessed since the previous U .S Fed hiking cycle of 2018. The cocktail of hawkish factors included higher inflation on a realized and forward-looking basis, a notable uplift in hawkish dialogue from global Central Banks, and continued geopolitical risks from the Russian/Ukraine conflict fuelling inflationary expectations.
At month end there was a barrage of hawkish comments from U.S Fed officials talking up the need for 50 basis point rate hikes which jolted U .S front-end rates higher and accelerated the flattening of the U.S curve and global short end markets. Jamieson Coote Bond’s long-held view that the U.S Federal Reserve has been behind the curve in its tightening cycle and believes a 50 basis point hike is a good opportunity to send a strong message to the market of their intentions to dampen inflation and choke demand in the process.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/62561ccfb863866a93c53efa_CC-JCB-Dynamic-Alpha-Fund-Monthly-Report-March-2022.pdfFebruary, 2022
For the month ending February, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned -0.19% (after fees), underperforming the RBA Cash Rate Total Return Index. February continued for the thematics that started the year, with interest rate hikes and global inflationary pressures , as well as the withdrawal of stimulus programs and geopolitical risks, which are expected to increase volatility across financial markets in 2022. As investors adjust to the next phase of the economic cycle, understanding these risks and how they will feed into the global economy will be key to defending portfolios.
At the start of the month the Reserve Bank of Australia (RBA)stressed that they were “prepared to be patient” as they left rates unchanged. This sanguine view of rates was not echoed by European Central Banks (ECB) Christine Lagarde at the ECB meeting at the start of the month who refused to rule out a 2022 rate hike. This triggered a move lower in European rates with the market moving to price in 40 basis point’s of tightening for 2022 – German’s 2-year bonds endured the worst week since 2008. The Bank of England also hiked 25 basis points to 0.50% with some members of the committee leaning towards a 50 basis point hike. Augmenting the move to higher yields in the first half of the month was a robust U.S Consumer Price Index print, which hit 7.5% year on year (YOY) in January in what was the fastest pace since 1982. The hawkish bent was also supported by U.S Fed’s President James B. Bullard who backed 100 basis points of tightening in the U.S by July which aided and abetted the weakness in global fixed income as U.S 10-year yield hit their highest levels since July 2019 at 2.04%.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/622ad26f8c672e819ce7e2d0_JCBDAF_A_202202.pdfJanuary, 2022
For the month ending January, the CC JCB Dynamic Alpha Fund – Class A units (the Fund) returned 0.09% (after fees), outperforming the RBA Cash Rate Total Return Index. 2022 started with bond markets on the back foot as over the month communication emanating from Central Bankers switched gears to display a desire to reduce financial accommodation from the monetary system. In particular the US bond markets corrected with the 2 year yield moving much higher after US Feds Powell’s hawkish tone indicated more frequent and potentially larger rate increases. Towards the end of the month at the FOMC meeting Powell suggested there was “quite a lot of room” to raise rates – which vindicated the market pricing of furthers hikes this year. Various US Fed officials also provided hawkish dialogue surrounding the inflation picture which was a step back from their “transitory” communication in 2021. The economic landscape continued to provide mixed signals as consumer confidence started to wane in the face of oil hitting 91USD for the first time since 2014 and US employment data missing expectations.
Domestically – CPI surprised to the upside and moved into the RBA’s band although the expectation is for it to show sustainability within that range. The domestic market recovered into month end as the market had fully priced the higher rates . The Chinese central bank in contrast to its global counterparts was in a dovish phase as it eased rates for the first time since March 2020. Positioning wise, the Fund continues to accumulate bonds in the AUD 3-5 yr sector which continue to offer compelling valuations given what is priced into the market. Driven by higher global yields and strong employment and inflation data, the market priced in 4 rates hikes for the next 12 months. JCB does not see this market pricing being delivered, and while markets can trade ‘cheap’ as global forces take hold, JCB are comfortable owning bonds looking for performance in time.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/6209a75f27aab546f3ea8c2a_JCBDAF_A_202201.pdfDecember, 2021
For the month ending December, the CC JCB Dynamic Alpha Fund (the Fund) returned 0.02% (after fees), outperforming the RBA Cash Rate Total Return Index. Risk markets were on the back foot early in the month as the US reported its first case of the Omicron variant as it continued to provide global uncertainty and “shutdown risk” as vaccine efficacy remained inconclusive. Equities also felt the brunt of comments from US Fed Chair Powell at the Senate banking committee where he suggested that it’s time to stop using the word “transitory” to explain inflation and hinted at faster removal of Central Bank stimulus .
The US CPI number was released mid-month and came in close to expectations with the bond market rallying following the number with anticipation that headline inflation could have peaked with recent indicators pointing to supply-chain bottlenecks having somewhat reduced. At its monthly meeting, the US Fed committed to conclude its asset-buying program earlier than planned and signalled an intention to move rates higher next year – which was largely priced into the market. The US Fed highlighted concerns over the new Omicron variant – suggesting that “risks to the economic outlook remain, including from new variants of the virus”. The Bank of England surprised markets as it became the first major central bank to hike rates since the pandemic started – raising borrowing costs by 15 basis points to 0.25% despite the country remaining in the grips of a new Covid wave as the more infectious Omicron variant pushed daily caseloads in the UK to the highest recorded total since the beginning of the pandemic. Heading into Christmas, President Biden’s $2 trillion economic agenda was left in tatters as Democratic Senator Joe Manchin blindsided the White House as he rejected the package. The competing agendas in the Democratic party and the slim margins in which they control both chambers underscores the fiscal cliff thematic which should prevail into 2022 and remain a drag on economic growth in the US and is one of the biggest issues confronting the markets next year. Governments around the world will be faced with the removal of stimulus in a post Covid world, and the effects should be expected to feed into consumers and as such a revision downwards of economic growth. Bond market volatility remained suppressed for the majority of the month with the US 10-year yield oscillating either side of the 1.45% level as the market grappled with the outcome of the Omicron virus and the guidance from Central Banks as they contemplate a withdrawal of monetary stimulus.
Domestically, the Australian bond market remained in a well confined range as the quarterly bond futures expiration was uneventful and the RBA held its cash rate at 0.1% for the final meeting of 2021. The RBA reinforced its guidance that it will not lift rates before inflation is anchored within the central bank’s 2-3% target band and it will review its bond-buying program in February. The Australian bond market remained supported into year-end by the rapid spread of the Omicron variant, with the spike in cases occurring against a backdrop of state authorities rolling back virus restrictions.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/61df5d3601a35f54e734fd06_JCBDAF_A_202112.pdfasset_class:
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Performance Reports
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