September, 2023
The fund returned -2.71% (gross of fees) over the month, underperforming the benchmark which returned -1.99%. Bond selection detracted -0.81% from relative returns, while currency selection added 0.08%. The top three bond detractors from relative returns were the overweight positions in Mexico, Colombia and New Zealand. The top three positive currency contributors to relative returns were the short positions in Euro and Thai Baht and the long position in Swedish Krona.
Major central banks in the US, UK and Euro area continued their rate hiking cycle during Q3 as core inflation remains persistent, although both the Bank of England and the Federal Reserve held rates unchanged at their last meetings of the quarter. Despite the tightening of policy over the last eighteen months, economic data has remained relatively resilient across many global economies. Such a backdrop, combined with renewed increases in the price of oil, have underpinned expectations of central bank policy rates staying “higher for longer”. This led to higher yields in September, and negative returns from global bonds over the quarter. The FTSE World Government Bond Index returned -2.3% in US dollar hedged terms with the unhedged index faring worse with a return of -4.3% as most index currencies weakened against the Dollar. The Colchester Global Bond programme underperformed somewhat relative to benchmark over the quarter, primarily as a result of exposure to Latin American bond markets.
The US economy continued to perform well with Q2 GDP recording a solid 2.1% annualised growth rate. Economic activity has been underpinned by a resilient labour market with the unemployment rate rising to a still low 3.8% in August. With underlying rates of inflation still above target, policy makers and market participants are debating whether or not higher rates are necessary, or whether the impact of prior policy tightening should be allowed time to fully exert its influence on inflation. Whatever the conclusion, investors have pushed bond yields to 16-year highs as expectations for any imminent lowering of rates fades away. The US Treasury market returned a negative -2.2% during September and -3.0% over the quarter whilst the Colchester Global Bond programme remains underweight this market.
Meanwhile in the Euro area, falling energy prices are helping to lower headline inflation which was reported at 4.3% in September, the lowest level in two years. The ECB raised its policy rate twice in the third quarter, as core inflation remains materially above target, but growth has been weak this year particularly in Germany. Euro government bonds recorded negative returns with the German market down -2.4% for both the month of September and the quarter. In contrast, the Norwegian bond market was relatively flat over the quarter, with a return of -0.3%. The Colchester programme is significantly underweight the Euro area and continues to hold an overweight position in Norwegian bonds.
On account of relatively attractive real yields in the region, the Colchester programme is overweight bond markets in Mexico and Colombia. Rising yields in both markets over the past month have been a negative contributor to relative returns however. Central banks in both economies have held rates steady even as regional peers in Chile and Brazil have lowered rates. Meanwhile in Asia, the Bank of Japan continues with its zero interest rate policy but did loosen somewhat its yield curve control policy during the summer. This allowed yields to increase and the Japanese market produced a return of -4.3% over the quarter, making it the worst performer amongst the major global bond markets in Q3.
On the currency markets the US dollar experienced a strong bounce over the past month. The British pound fell -3.7% in September as the Bank of England chose to hold its base rate at 5.25%. The Japanese yen also weakened, and both currencies are overweight positions in the Colchester programme, which holds an underweight to the US dollar. Some of this negative performance was offset by an underweight to the Euro however, which fell -3.0% over the quarter. Positive contributions to relative returns also came from exposure to the Norwegian krone and Colombian peso, which appreciated 0.7% and 3.2% respectively over the quarter. The backdrop of a rising oil prices was likely a material factor underpinning each of these currencies.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-Sept-2023.pdfAugust, 2023
The fund returned -1.15% (gross of fees) over the month, underperforming the benchmark which returned -0.29%. Bond selection detracted -0.48% from relative returns and currency selection detracted -0.38%. The top three bond detractors from relative returns were the overweight positions in Mexico and Colombia and the underweight position in Europe. The top three currency detractors from relative returns were the short positions in United States Dollars and Euro and the long position in Norwegian Krone.
The past month has offered hope for continued declines in inflation and a possible “soft landing” for the global economy but bond yields generally increased over the month. As a consequence the FTSE World Government Bond index experienced a modest negative return for the month of -0.2% in US dollar hedged terms. In unhedged terms the index was down -1.4% as the US dollar performed well against most major currencies.
In the US, annual headline inflation actually increased slightly to 3.2% in August, up from 3.0% the previous month. There was better news from the core inflation reading however, which fell to 4.7%, continuing its downward trend. The unemployment rate increased to 3.8% this month from 3.5% the previous month. This rise was largely driven by people returning to the workforce and the participation rate rose to the highest rate since the Covid pandemic began in early 2020. Meanwhile at the Jackson Hole meeting of central bankers the mood was generally one of caution and expectations of a “higher for longer” interest rate environment. Against this backdrop US treasuries returned -0.5% over the month.
Eurozone headline inflation fell to 5.3% down from the previous month’s reading of 5.5%, although the outlook for inflation in the region is clouded by rising energy prices and especially natural gas prices. Unemployment across the region stayed at 6.4% for the fourth successive month as labour markets remain robust. The bond market in Germany returned 0.3%, as did the Spanish bond market, whilst the Austrian market returned 0.5%. The ECB did not hold a policy meeting in August, so attention focused on the Bank of England, which did increase its interest rate by 0.25% to 5.25% adding further to the housing market woes as mortgage rates continue to rise. UK house prices fell at the fastest annual pace since 2009 in August according to the mortgage provider Nationwide. UK bonds returned -0.6% over the month.
Asian bonds markets also struggled over the month. Japanese inflation was reported at 3.3% in the year to July and the government bond market returned - 1.3% as speculation continues around whether the central bank will end their yield curve control policy in the near future. Colchester maintains its underweight in Japan as it does in China where bonds rallied over the month by 0.6% with the central bank cutting the Loan Prime Rate to 3.45%. The country continues to struggle with weak growth, over-levered property developers, and inflation has now turned negative with the July figure standing at -0.3%.
The New Zealand bond market also sold off, returning -0.7% over the month. The job market in the country remains tight putting upward pressure on wages, this is despite near record levels of migration to the country. Throughout the Covid pandemic, the country tightly restricted inward movement and net migration turned negative, but this has now turned around drastically over the past twelve months. In Australia the bond market enjoyed better performance, gaining 0.6% in August, with pay rises in the country staying relatively constrained compared to other developed market peers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-August-2023.pdfJuly, 2023
The fund returned 0.22% (gross of fees) over the month, outperforming the benchmark which returned -0.40%. Bond selection added 0.10% to relative returns and currency selection added 0.52%. The top three positive bond contributors to relative returns were the underweight positions in Japan and United States and the overweight position in Singapore. The top three positive currency contributors to relative returns were the long positions in Norwegian Krone, Colombian Peso and Swedish Krona.
Major central banks in the US and Europe continued their rate hiking cycle in July as core inflation remains persistent. Despite monetary policy tightening however, recent economic data have been encouraging and point to substantial resilience across many global economies. July was largely a positive month for risk assets though government bond performance was marginally negative as yields moved higher. The FTSE World Government Bond Index returned -0.3% in US dollar hedged terms whilst the unhedged return for the index fared a little better at positive 0.3% given the weakening of the US dollar.
In the US, annual headline inflation fell to 3.0% in June providing further support to the growing acceptance that inflation pressures may be abating. The Federal Reserve elected to remain cautious however and resumed its tightening after a pause in June, lifting the target range for the policy rate by 25bps to 5.25%- 5.50%. The decision was affirmed by subsequent better-than-expected economic data, with second quarter GDP growth coming in at an annualised pace of +2.4% (vs. +1.8% expected). Consumer spending slowed a touch after its strong start to the year, but this was more than made up for by investment spending. The US bond market returned -0.3% and the Colchester global bond programme remains underweight the US bond market.
In the euro area, the ECB likewise increased their policy rate by 25bps in July bringing the deposit rate to 3.75%. Eurozone inflation continued its downtrend reaching 5.3% in July, however core inflation remained unchanged at 5.5%. Speaking at a press conference, ECB president Lagarde, said the euro area’s nearterm economic outlook had “deteriorated, owing largely to weaker domestic demand”. The region’s economy grew 0.3% in Q2 with high inflation and tighter financing condition dampening spending. Returns across eurozone bond markets were muted for July, averaging -0.2%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-July-2023_FINAL.pdfMay, 2023
The fund returned -0.11% over the month, outperforming the benchmark which returned -0.59%. Bond selection added 0.46% to relative returns and currency selection added 0.02%. The top three positive bond contributors to relative returns were the overweight positions in Colombia and Indonesia and the underweight position in United States. The top three positive currency contributors to relative returns were the long positions in Colombian Peso and Mexican Peso and the short position in Euro.
The month of May continued to be dominated by the ongoing US debt ceiling negotiations as we approached the critical deadline when the US would “run out of money” and financial markets fearing the possibility of a technical default. Meanwhile global headline inflation continues to fall but ‘sticky’ core inflation remains a concern to policymakers globally as both the Federal Reserve and the ECB raised policy rates this month. Against this backdrop, the FTSE World Government Bond Index returned negative 0.4% in US dollar hedged terms whilst the unhedged return for the index fared worse at -2.2% over the month given the strengthening of the US dollar. In the US, the political stand-off between the White House and Republicans in Congress came to an end when the Senate approved the deal to lift the debt ceiling until after the 2024 presidential election.
Whilst this allayed fears that the US was on the brink of an unprecedented default, Fitch took the decision to keep the US credit rating on negative watch. On a positive note, US inflation continued its downtrend reaching 4.9% in April. The US bond market returned a negative 1.2% in May and the Colchester global bond programme remains underweight the US bond market. Eurozone inflation had fallen to its lowest level since the beginning of the war in Ukraine, to 6.1% in May, down from 7% in April. Despite this, the European Central Bank’s views on core inflation continue to be that “the latest developments were broadly seen as worrisome” and hence has signalled more interest rate rises lie ahead to bring inflation down to its target level.
Not withstanding this, eurozone bond markets performed positively in May, averaging a return of 0.6% over the month. Elsewhere in Europe, the UK was amongst the worst performing bond markets over the month with a negative return of 4.1%. This comes despite inflation falling further to 8.7% in April from 10.1% in the previous month. However, with food inflation remaining elevated at 19% there are increasing concerns that the Bank of England would need to tighten monetary policy for longer than expected.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-May-2023.pdfDecember, 2022
The fund returned -1.01% (gross of fees) over the month, outperforming the benchmark which returned -2.19%. Bond selection added 1.05% to relative returns and currency selection added 0.13%. The top three positive bond contributors to relative returns were the underweight positions in Europe, United States and Japan. The top three positive currency contributors to relative returns were the long positions in Japanese Yen and Korean Won and the short position in United States Dollars. 2022 was a tumultuous year for financial markets as rampant inflation hit multidecade highs across the globe. This backdrop forced central banks into aggressive tightening of monetary policy, paving the way for negative returns in both equities and sovereign bonds. The FTSE World Government Bond Index returned -12.9% over the year in US dollar-hedged terms, whilst the USD unhedged version of the index returned -18.3%, as US dollar strength persisted for much of the year before reversing in the last quarter. This reversal in the past three months fuelled a positive return to round out the year, with the WGBI returning 3.8% in USD unhedged terms. In the US, headline inflation continued its downtrend, falling from 7.7% in October to 7.1% in November. Subsequently, the Federal Reserve reduced the pace of policy tightening from 75bps to 50bps in December, whilst maintaining that further hikes were warranted in 2023. The Treasury market returned -0.7% over the month, bringing the annual return to -12.6%. The Colchester global bond programme remains underweight US Treasuries although exposure has been increased as yields backed up this year. Returns from Canadian bonds were similar, posting -1.5% over the month and ending the year at -10.3%. As Mexico’s inflation continued to show signs of slowing down from its peak of 8.7% in August, Banxico followed regional peers and raised interest rates by 50bps to 10.5%. Mexico’s bond market returned 1.6% over the month, finishing the year with a positive return of 1%. We continue to hold a significant overweight to Mexican government bonds on account of the relatively attractive valuation and robust monetary policy framework.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-Dec-2022_Final.pdfNovember, 2022
The fund returned 2.74% (gross of fees) over the month, outperforming the benchmark which returned 1.98%. Bond selection added 0.59% to relative returns and currency selection added 0.18%. The top three positive bond contributors to relative returns were the overweight positions in Mexico, Indonesia and Poland.
The top three positive currency contributors to relative returns were the long positions in Japanese Yen and Korean Won and the short position in United States Dollars. The performance of global bond markets was generally positive in November as investor sentiment continued to improve following a lower inflation print in the US, with market participants viewing this as a strong signal that the Fed will slow the pace of rate hikes. The FTSE World Government Bond Index returned 2.1% in US dollar-hedged terms, whilst the unhedged version of the index returned 4.5% as the US dollar weakened and erased some of its gains from earlier in the year.
In the US, the Federal Reserve once again raised its target range for the policy rate by 75bps in November. The target is now 3.75%-4.00%, although Chair Powell signalled that the Fed will likely slow the pace of rate rises with a “downshift” to a 0.5% increase at the next meeting. He did warn however that the US central bank has a long way to go in its fight against inflation and the Fed would act accordingly until price pressures have slowed to a level more in line with the 2% target. Encouragingly, headline inflation reduced from 8.2% the previous month to 7.7% in October, continuing the downward trend for the second half of 2022.
The Treasury market returned 2.6% over the month as yields declined. The Colchester global bond programme remains underweight US Treasuries. Elsewhere, returns in Canada were similar, posting 2.4% over the month as we remain broadly flat the market relative to the index. Mexico’s bond market was up 3.5% on the month as Banxico followed regional peers and raised interest rates to 10%. We continue to hold a significant overweight to Mexican government bonds on account of the relatively attractive valuation. In Colombia, the central bank hiked rates to 11%, whilst the new President’s fiscal reform was approved. The local Colombian government bond market rallied 4.5%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-Nov-2022_Final2.pdfOctober, 2022
The fund returned -0.16% over the month, outperforming the benchmark which returned -0.39%. Bond selection added 0.19% to relative returns and currency selection added 0.04%. The top three positive bond contributors to relative returns were the underweight positions in United States and United Kingdom and the overweight position in Singapore. The top three positive currency contributors to relative returns were the long positions in Norwegian Krone and British Pound and the short position in Swiss Franc. Investor sentiment improved somewhat in October, fuelling a rally in risk assets with the markets beginning to debate whether or not the pace of monetary tightening from global central banks may be slowing. Inflation remains a key concern and US CPI declined slightly in September to 8.2%. Meanwhile in Europe, although inflation pushed higher, unseasonably warm weather has allowed gas reserves to remain high and put downward pressure on wholesale gas prices which had been extremely elevated.
Meanwhile, the political angst in the UK has also abated with the installation of a new Prime Minister providing some respite to markets. Global government bonds experienced mixed fortunes in October with the FTSE World Government Bond Index returning -0.4% in US dollar hedged terms. The unhedged version of the index performed similarly, at -0.5%. Despite a dearth of economic data in the US in October, Treasury yields continued to push higher, with the 10-year Treasury yield pushing through 4% for the first time since before the global financial crisis in 2008. The return of the US bond market was -1.4% underperforming most of the other major markets. Our prospective real yield valuation has risen with the rise in nominal yields, and is now well into positive territory at around 1.0%, meaningfully above cyclical lows of -1.5%. The Global Bond programme has held an active underweight to the US market for some time, but we have reduced the scale of this underweight exposure somewhat in response to shifting valuations.
Meanwhile, over the borders in both Mexico and Canada, local bond markets fared better, returning - 0.1% and -0.9% respectfully. Eurozone bond markets experienced a varied month of performance, despite the European Central Bank increasing their main monetary policy rate by 0.75% to 2.0%. German bonds returned -0.6% in October, France performed better with a return of 0.1%, with the outperformer in the Eurozone being Italy. The Italian market recovered from its pre-election weakness to rally 1.0% over the month. The Colchester Global Bond programme remains substantially underweight the region, given the continued low real yields compared to alternatives in other nonEuropean markets. The installation of yet another Prime Minister in the UK met a broadly favourable response from financial markets, following the calamitous effort to reduce taxes under the previous leadership. The new PM, Rishi Sunak, is a former Chancellor of the Exchequer and generally considered to be a safer pair of hands as regards economic policy. The UK gilt market swiftly recovered and returned 3.3% on the month
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-Oct-2022.pdfSeptember, 2022
The fund returned -3.16% over the month, outperforming the benchmark which returned -3.41%. Bond selection added 0.50% to relative returns, while currency selection detracted -0.24%.
The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three currency detractors from relative returns were the short positions in United States Dollars, Swiss Franc and Euro.
The third quarter has been characterised by the ongoing tightening of monetary policy by major central banks in response to elevated levels of inflation. This backdrop translated into volatility across financial markets, with both global equities and global bonds declining. As yields moved higher, the FTSE World Government Bond Index returned -3.1% in September and -3.8% over the quarter in US dollar hedged terms. The US dollar continued its upward trajectory this quarter, leading to a more negative unhedged index return of -7.6%. Much of this selloff occurred in September where the unhedged index declined -5.1%. In the US, the Federal Reserve raised its target rate by another 75bps in its September meeting. This brings the cumulative year to date increase to a substantial 3% and in delivering its policy decision, the Fed also signalled that more rate hikes will be needed to lower inflation to target.
The rate of inflation has fallen slightly for the second consecutive month to 8.3% in August from 8.5% the previous month. However, this was somewhat higher than expected and continued to put upward pressure on bond yields. The Treasury market fell -3.4% during September and posted -4.5% for the quarter. The Colchester global bond programme remains underweight in US Treasuries relative to other markets in the opportunity set, although real yield valuations in the US have improved somewhat.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/Colchester-Global-Government-Bond-Fund-Class-I-Sep-2022.pdfAugust, 2022
The fund returned -2.55% over the month, outperforming the benchmark which returned -3.11%. Bond selection added 0.79% to relative returns, while currency selection detracted -0.24%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three currency detractors from relative returns were the long positions in Japanese Yen and Swedish Krona and the short position in United States Dollars.
August was a difficult month for global bonds as renewed investor concerns over higher inflation led to a selloff in markets. Concerns were particularly elevated in Europe where the threat of Russian gas supplies being cut off before the winter resulted in significant energy price rises in the region. The risk is that this will push the already high inflation in the region well into double digits, whilst also crimping economic activity. The FTSE World Government Bond Index returned - 3.0% over the month in US dollar hedged terms and the unhedged return was - 4.4% as the US dollar continued to strengthen against most of the currencies in the benchmark. In the United States the annual meeting of central bankers at Jackson Hole drew investor attention.
Federal Reserve Chairman Jerome Powell gave a short, but rather bleak, speech at the event outlining the Fed’s conviction in lowering inflation. He explained that the effort to reduce inflation will probably “require a sustained period of below-trend growth,” and that it will “bring some pain to households and businesses.” Having said, that there was some positive news for US policymakers, as inflation declined to 8.5% in August from 9.1% the month before. Against this backdrop the US bond market fell by -2.5% over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/190866372.pdfJuly, 2022
The fund returned 2.24% over the month, underperforming the benchmark which returned 2.29%. Bond selection detracted -0.13% from relative returns, while currency selection added 0.09%.
The top three bond detractors from relative returns were the underweight positions in Europe, United States and Japan. The top three positive currency contributors to relative returns were the short positions in Thai Baht, Euro and United States Dollars. Over the month, economic data signalled further slowing of the global economy bringing to the fore the question over whether inflation may be peaking sooner than later. Global government bond yields fell as fears over weakening global growth mounted.
The FTSE World Government Bond Index returned 1.8% in unhedged terms and 2.3% over the month in US dollar hedged terms as the US dollar continued to strengthen modestly. The Federal Reserve delivered the second 0.75% hike in July, after headline inflation exceeded expectations to 9.1%. Latest data showed that the US economy experienced two consecutive quarters of negative real GDP growth adding to investors concerns about global recession risks.
Against this backdrop, investors began to price in a less aggressive pace of monetary tightening leading to a fall in US Treasury spreads. The US Treasury market returned 1.3% in July. In our assessment, the prospective real yield of -1.0% on Treasuries at the end of the month remains unattractive relative to other markets in the global opportunity set.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/190071013.pdfJune, 2022
The fund returned -1.46% over the month, underperforming the benchmark which returned -1.29%. Bond selection added 0.15% to relative returns, while currency selection detracted -0.32%. The top three positive bond contributors to relative returns were the underweight positions in United States and United Kingdom and market selection in Europe. The top three currency detractors from relative returns were the short positions in Swiss Franc and United States Dollars and the long position in Colombian Peso.
During the second quarter market concerns over a potential global recession rose, amidst high inflation and increasingly hawkish central bank rhetoric and policy. Equity markets repriced sharply faced with the twin headwinds of lower growth and higher real yields. The MSCI World Index of global equities declined -8.8% in June and -16.6% over the quarter in USD terms. Bonds markets returns were negative also, albeit less severe, with the stabilisation in medium-term inflation expectations containing yields somewhat. The FTSE World Government Bond Index returned -1.2% in June and -4.5% over the quarter in US dollar hedged terms, and -3.1% and -8.9% respectively, in unhedged terms as the dollar strengthened.
The shift in global monetary policy over the quarter was led by the US Federal Reserve which commenced a reduction of its balance sheet as well as implementing a combined 125bps of rate increases over the period. In testimony to Congress Chairman Powell indicated that the US economy was strong enough to withstand tighter monetary policy, but he admitted a recession is “certainly a possibility”. US Treasuries fared relatively well over the quarter compared to many bond markets, generating a return of -3.7%. In contrast, the UK Gilt market returned -8.7% and the German Bund market -6.5%. The ECB has not yet raised rates in the Eurozone but its more hawkish stance has already created a headache for policymakers as spreads on lower rated countries such as Italy widened. As yields on 10yr Italian government bonds reached 4% the ECB reacted by announcing it would look to establish an “anti-fragmentation instrument” to maintain stability in the market. Elsewhere, the Swiss National Bank announced a surprise interest rate hike of 50bps, its first rate increase since 2007.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/189170709.pdfMay, 2022
The fund returned -0.03% over the month, outperforming the benchmark which returned -0.72%. Bond selection added 0.72% to relative returns, while currency selection detracted -0.03%. The top three positive bond contributors to relative returns were the underweight positions in Europe and United Kingdom and the overweight position in Mexico. The top three currency detractors from relative returns were the long positions in Malaysia Ringgit and Norwegian Krone and the short position in Peruvian Sol. During the month of May financial market concern over a potential global recession rose, amidst high inflation and increasingly hawkish central bank rhetoric and policy. While the prospect of deteriorating growth generally tempered the trend of rising bond yields, there were mixed returns from global bond markets. The FTSE World Government Bond Index returned -0.7% over the month in US dollar hedged terms and -0.1% in unhedged terms as the US dollar weakened.
The Federal Reserve hiked interest rates by 0.5% during May and announced that from the 1st of June it will begin to reduce the size of its balance sheet, referred to as Quantitative Tightening (QT). By not replacing maturing Treasury and Mortgage-Backed Securities, the Federal Reserve could reduce its balance sheet by approximately $1 trillion or 11% over the course of a year. Despite this backdrop, the US Treasury market actually eked out a positive return of 0.1% in May. Supporting the bond market, inflation in the year to April eased to 8.3% as did inflation expectations, as proxied by 10-year breakeven rates, which fell notably from a recent high of over 3% to 2.7% over the month. In our assessment, the prospective real yield of -1.1% on Treasuries at the end of the month remains unattractive relative to other markets in the global opportunity set
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/188170789.pdfApril, 2022
The fund returned -2.00% over the month, outperforming the benchmark which returned -2.90%. Bond selection added 0.90% to relative returns and currency selection added 0.01%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three positive currency contributors to relative returns were the long positions in Malaysia Ringgit and Mexican Peso and the short position in New Zealand Dollars. Bond markets continued to face pressure from high inflation and expectations of tighter monetary policy globally during the month of April. This backdrop, along with the ongoing Russian invasion of Ukraine and new Covid lockdowns in China compounded concerns about a slowdown in economic activity. Global risks assets fell with the S&P 500 for example dropping 8.7%. Global government bonds performed better than equities but still posted a negative return over the month. The FTSE World Government Bond Index returned -2.7% over the month in US dollar hedged terms and the unhedged return was -5.9% as the US dollar continued to gain strength.
US inflation rose again with the most recent data for March at 8.5%. At the same time, unemployment fell to 3.6% and average hourly earnings increased by 5.6% compared to a year ago. High inflation and a tight labour market has pushed the Federal Reserve towards a more hawkish tone on inflation. The prospect of substantially tighter monetary policy weighted on US Treasuries, resulting in a negative return of -3.1% over the past month. Despite the rise in nominal yields, we remain meaningful underweight US bonds, given that the prospective real yield remains relatively unattractive compared to other global bond market.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/187205320-1.pdfMarch, 2022
The fund returned -1.89% over the month, outperforming the benchmark which returned -2.19%. Bond selection added 0.50% to relative returns, while currency selection detracted -0.20%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three currency detractors from relative returns were the long positions in Japanese Yen, Malaysia Ringgit and British Pound.
The first quarter of 2022 was a difficult one for markets as investors grappled with the terrible humanitarian and economic implications of the Russian invasion of Ukraine. These implications include higher prices for food and energy, consequently higher inflation and a faster pace of interest rate hikes by central banks. These issues weighed on major global equity and bonds markets over recent months. The MSCI World Index fell by 5.2% over the quarter whilst the FTSE World Government Bond Index in USD hedged terms fared marginally better with a return of -4.8% over the quarter. The month of March was a particularly difficult one for global bonds with yields rising significantly. In unhedged terms, returns for March and for the first quarter were -3.4% and -6.5% respectively; comparatively weaker than the hedged index given the relative strength of the US dollar.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/186112503.pdfJanuary, 2022
The fund returned -1.07% over the month, outperforming the benchmark which returned -1.54%. Bond selection added 0.36% to relative returns and currency selection added 0.11%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three positive currency contributors to relative returns were the long positions in Malaysia Ringgit, Japanese Yen and Colombian Peso. The year started with a renewed focus on inflationary pressures, and the implications for the pace and scale of monetary tightening that will happen this year. The prospect of tightening financial conditions led to a sell-off in risk assets with most equity markets falling over the month. Bond markets also retreated somewhat as the prospect of higher interest rates led to the FTSE World Government Bond Index returning -1.5% over the month in US dollar hedged terms. The unhedged return was -2.1% as the US dollar gained against most index currencies in January.
US inflation rose again with the December release coming in at 7.0%, the highest inflation the country has experienced since the early 1980’s. This fuelled market fears that the Federal Reserve might have fallen behind the curve in curbing price pressures. Although the Fed did not raise rates at their January meeting, Chair Powell was clear that bond purchases were likely to stop in March and that it would soon be appropriate to raise the target rate. This backdrop led to a rise in yields and negative returns on US Treasuries of -1.8% over the month. Despite the sell-off we still believe that US bonds remain relatively expensive, however. Inflationary pressures in the economy are likely to persist and although we expect inflation to fall from the current elevated level, it is unlikely to return to prepandemic levels over our forecast horizon. On the positive side, GDP figures showed the US economy grew at an annual rate of 5.7% in 2021, the highest rate since 1984.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/183931680.pdfDecember, 2021
The fund returned -0.47% over the month, outperforming the benchmark which returned -0.93%. Bond selection added 0.48% to relative returns, while currency selection detracted -0.02%. The top three positive bond contributors to relative returns were the underweight positions in Europe, United States and United Kingdom. The top three currency detractors from relative returns were the long positions in Japanese Yen, Malaysia Ringgit and Swedish Krona
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/182318391.pdfNovember, 2021
The fund returned 0.57% over the month, underperforming the benchmark which returned 1.25%. Bond selection detracted -0.50% from relative returns and currency selection detracted -0.17%. The top three bond detractors from relative returns were the underweight positions in Europe, United States and United Kingdom. The top three currency detractors from relative returns were the short positions in United States Dollars, Swiss Franc and Euro
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/181508279.pdfOctober, 2021
The fund returned -0.72% over the month, underperforming the benchmark which returned -0.19%. Bond selection detracted -0.40% from relative returns and currency selection detracted -0.12%. The top three bond detractors from relative returns were the overweight positions in Singapore and South Korea and the underweight position in United Kingdom. The top three currency detractors from relative returns were the long positions in Japanese Yen, Malaysia Ringgit and Mexican Peso
Global bond markets generated mildly negative returns in October, as expectations of monetary policy tightening were brough forward in several economies. Central banks are reacting to upward pressure on inflation and adjusting their guidance to markets as regards the future path of asset purchase programmes and interest rates. The FTSE World Government Bond Index returned -0.4% in US dollar unhedged terms in October as short-dated yields in particular moved higher. The USD dollar hedged return on the index was a slightly better -0.2% this month, reflecting a modest strengthening of the US dollar against the Japanese yen.
As mentioned last month, the US Federal Reserve has set the stage to wind down its bond purchases and data showed that headline inflation rose to 5.4% in the year to September. The US Treasury market was flat over the month however, leaving our prospective real yield valuation at a relatively unattractive -1.2%. The Monetary Policy Committee of the Bank of Canada surprised investors this month with a sharply hawkish statement, announcing an end to its quantitative easing programme. Markets had expected a more gradual tapering of purchases. The return on Canadian government bonds was -0.9% this month as yields pushed higher. Valuations in the Canadian market are somewhat more attractive than in the US with real yields close to zero. The Colombian government bond market also posted a negative return in October, -1.6% in local terms. Colombia’s central bank raised the policy rate by 0.5% to 2.5%, as the balance of risks to inflation has shifted significantly higher over recent months
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/180804776.pdfSeptember, 2021
The fund returned -0.99% over the month, outperforming the benchmark which returned -1.22%. Bond selection added 0.08% to relative returns and currency selection added 0.15%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three positive currency contributors to relative returns were the short positions in Thai Baht, Euro and New Zealand Dollars.
September proved to be a difficult month for financial markets as global equity and bond markets weakened. The third quarter ended on expectations of more persistent inflationary pressures and slower global growth driven by rising energy prices, supply bottlenecks in goods and labour, and the continuing impact of the Delta variant in some regions. Given these concerns, global bond yields rose in September, reverting to levels witnessed at the beginning of the quarter. The FTSE World Government Bond Index returned -1.2% in USD hedged terms for September whilst for the quarter the return was flat. The return on the unhedged index was -2.3% for the month and -1.2% for the quarter, reflecting an overall strengthening of the US dollar
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/180141172.pdfAugust, 2021
The fund returned 0.02% over the month, outperforming the benchmark which returned -0.33%. Bond selection added 0.25% to relative returns and currency selection added 0.10%. The top three positive bond contributors to relative returns were the underweight positions in Europe and United States and the overweight position in Indonesia. The top three positive currency contributors to relative returns were the long positions in Malaysia Ringgit, Colombian Peso and Norwegian Krone.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/178823372.pdfJuly, 2021
The fund returned 0.95% over the month, underperforming the benchmark which returned 1.51%. Bond selection detracted -0.46% from relative returns and currency selection detracted -0.11%. The top three bond detractors from relative returns were the underweight positions in Europe, United States and United Kingdom. The top three currency detractors from relative returns were the short positions in Swiss Franc, Euro and New Zealand Dollars
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/176175645.pdfJune, 2021
The fund returned 0.44% over the month, underperforming the benchmark which returned 0.55%. Bond selection detracted -0.28% from relative returns, while currency selection added 0.18%.The top three bond detractors from relative returns were the underweight positions in United States and Europe and the overweight position in Mexico. The top three positive currency contributors to relative returns were the long positions in Malaysia Ringgit, Mexican Peso and Japanese Yen.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/174351185.pdfApril, 2021
The fund returned 0.22% over the month, outperforming the benchmark which returned 0.00%. Bond selection added 0.29% to relative returns, while currency selection detracted - 0.07%.The top three positive bond contributors to relative returns were the overweight positions in US inflation-linked bonds and Indonesian nominal bonds and the underweight position in European nominal bonds. The top three currency detractors from relative returns were the short positions in Swiss Franc and Euro and the long position in Colombian Peso.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/171429622.pdfMarch, 2021
The fund returned -0.37% over the month, underperforming the benchmark which returned -0.21%. Bond selection detracted -0.40% from relative returns, while currency selection added 0.25%.The top three bond detractors from relative returns were the overweight positions in Mexico, Colombia and Singapore. The top three positive currency contributors to relative returns were the short positions in Swiss Franc, New Zealand Dollars and Euro.
File: https://commentary.quantreports.net/wp-content/uploads/2021/05/170202613.pdfasset_class:
asset_category:
peer_benchmark:
broad_market_index:
manager_contact_details: Array
ticker: ETL5525AU
release_schedule: Monthly
structure: Managed Fund
commentary_block: Array
factsheet_url:
https://colchesterglobal.com.au/our-funds/global-government-bond-fund/#fund-facts
Fund Newsletter
fund_features:
Global Government Bond I aims to generate income and increase the amount invested by investing in a globally diversified portfolio of government bonds and currencies. The Fund generally will acquire positions in debt securities, such as fixed and floating rate bonds, inflation-indexed bonds, zero-coupon bonds, discount bonds, eurobonds, global bonds and yankee bonds, and in currencies of countries that are rated Investment Grade.
- Both long and short currency positions may be established through the use of currency forwards (including non-deliverable currency forwards) in global currencies and may be held without owning securities denominated in such currencies.
- Typically positions are balanced such that the sum of currency active long positions matches the sum of currency active short positions.
- Colchester will normally seek to hedge the Class I’s foreign currency exposure between 70% to 130% to Australian Dollars.