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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Sept-2023.pdfAugust, 2023
The fund returned -1.16% (gross of fees) over the month, underperforming the benchmark which returned -0.29%. Bond selection detracted -0.49% 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-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 0.09% 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-July-2023.pdfJune, 2023
The fund returned 0.17% (gross of fees) over the month, outperforming the benchmark which returned -0.36%. Bond selection added 0.42% to relative returns and currency selection added 0.11%. The top three positive bond contributors to relative returns were the overweight positions in Colombia and Mexico and the underweight position in United States. The top three positive currency contributors to relative returns were the short positions in United States Dollars and Thai Baht and the long position in Colombian Peso.
The second quarter got off to an uncertain start, as investors worried about the health of the US banking system after a number of regional bank failures in March and the emergency takeover of Credit Suisse fueled concerns in Europe. As concerns over banks eased, markets had the US debt ceiling negotiations to contend with but this issue was resolved, at least for now. The macroeconomic backdrop over the quarter continues to centre on inflation and monetary policy. Despite headline inflation rates generally falling, core inflation remains ‘sticky’ leading central bankers in the US, the Eurozone, and the UK to continue to raise interest rates. Against this backdrop, the FTSE World Government Bond Index returned -0.4% in US dollar hedged terms whilst the unhedged return for the index fared worse at -1.8% over the quarter given the strengthening of the US dollar against currencies like the Japanese yen.
Despite the banking sector turmoil and the debt ceiling deliberations, the US economy continues to expand, at least for now. Whilst headline inflation has dropped rapidly to 4% in May, core inflation remained stubbornly high at 5.3%. Given this environment of elevated inflation and resilient growth the Federal Reserve hiked rates by 25bps in May before pausing in June for the first time in over a year. Indications are that the Fed will push rates higher again in the coming months and bond yields rose over the quarter. The US Treasury market returned a negative -1.4% over the period and the Colchester global bond programme remains underweight.
As in the US, headline inflation in the Eurozone in May fell to its lowest level since the beginning of the war in Ukraine, down from 7% in April to 6.1%. Of concern to policymakers at the ECB however is the rate of core inflation, excluding the impact of food and energy, which stood at 5.4% in June, only slightly below the rate at the end of the first quarter. The ECB increased its policy rate by 25bps in both May and June bringing their deposit rate up to 3.5% – its highest level in 22 years. Notwithstanding this, Eurozone government bonds held steady over the quarter with German bonds recording a modest negative performance of -0.4% and Italian bonds generating a positive 0.9% over the quarter. In contrast, the UK was amongst the worst performing bond markets over the quarter with a negative return of -6.2%, as inflation surprised to the upside several times. The Bank of England surprised markets somewhat with a 50bps rate hike in June whilst remaining hawkish as inflation stands at 8.7% in May, the highest amongst the G7 economies.
Turning to Asia, Japan’s CPI dropped back to its March level of 3.2% in May and the economy recorded strong growth for Q1 of 1.6% annualised. This backdrop coupled with the unchanged policy of the Bank of Japan, led the government bond market to a positive return of 0.5%. The Singaporean bond market generated the same return over the quarter and remains a significant overweight in the Colchester global bond programme. In contrast, the Australian bond market sold off over the quarter, returning -4.0%. This comes amidst the Reserve Bank decision to restart interest rate increases after a pause in April. Moreover, Australia is set to raise the minimum wage by 5.75% on the back of soaring living costs, a decision that risks further stoking inflation.
On the currency markets the US dollar recovered strongly on the back of resilient economic data, particularly relative to other developed markets. The Japanese yen was the worst performing currency over the quarter, depreciating by over 7% against the US dollar. The Swedish krona and Norwegian krone also recorded negative returns of -4.0% and -2.2% respectively over the same period, but the British pound gained 2.8%. Latin American currencies fared even better however with the Colombian and Mexican peso rising 11.6% and 5.3% respectively, benefiting our overweight position in both.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-June-2023_Final.pdfMay, 2023
The fund returned -0.11% over the month, outperforming the benchmark which returned -0.59%. Bond selection added 0.45% 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Dec-2022_Final.pdfNovember, 2022
The fund returned 2.73% (gross of fees) over the month, outperforming the benchmark which returned 1.98%. Bond selection added 0.57% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Nov-2022_Final.pdfOctober, 2022
The fund returned -0.15% over the month, outperforming the benchmark which returned -0.39%. Bond selection added 0.20% 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Sep-2022.pdfAugust, 2022
The fund returned -2.57% over the month, outperforming the benchmark which returned -3.11%. Bond selection added 0.78% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Aug-2022.pdfJuly, 2022
The fund returned 2.25% over the month, underperforming the benchmark which returned 2.29%. Bond selection detracted -0.12% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-July-2022.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/2021/01/Colchester-Global-Government-Bond-Fund-Class-I-June-2022.pdfMay, 2022
The fund returned 1.38% over the month, outperforming the benchmark which returned 0.81%. Bond selection added 0.14% to relative returns and currency selection added 0.43%. The top three positive bond contributors to relative returns were the underweight positions in Romania and Czech Republic and the overweight position in Mexico. The top three positive currency contributors to relative returns were the overweight positions in Colombian Peso, Mexican Peso and Polish Zloty.
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 emerging market government bonds. The JP Morgan GBI-EM Global Diversified Index returned 0.1% over the month in US dollar hedged terms and 1.8% in unhedged terms as the US dollar weakened.
In Central and Eastern Europe inflation remains extremely elevated with the region experiencing double digit price increases. Local government bonds in the Czech Republic returned -1.7% as monetary policy continues to tighten. Interest rates in the country were raised to 5.75% this month, an increase of 75bps. In Hungary, the bond market returned -0.1% amidst a similar backdrop. Turning to Poland, the bond market performed slightly better, returning 0.2% as the real yield on offer has become more attractive over recent months and quarters. Real GDP growth in Poland has been strong in Q1 of this year and the economy is expected to perform better than the Euro area in 2022. Inflation remains a concern however and monetary policy is being tightened with an increase of rates to 5.25% in May. The Colchester Local Markets programme holds an active underweight to bond markets in the region and as such this has been a positive contributor to relative returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Emerging-Markets-Bond-Fund-Class-I-May-2022.pdfMarch, 2022
The fund returned -1.90% over the month, outperforming the benchmark which returned -2.19%. Bond selection added 0.49% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Mar-2022.pdfFebruary, 2022
The fund returned -0.92% over the month, outperforming the benchmark which returned -1.13%. Bond selection added 0.42% to relative returns, while currency selection detracted -0.21%. 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 Malaysia Ringgit, Japanese Yen and Swedish Krona.
Investors, and indeed the world at large, were shocked this month by the decision of Russian President Putin to invade neighbouring Ukraine. This had the effect of pushing most global risk assets lower, with the S&P 500 index of US equities dropping 3% and European equities falling even more. Global government bonds performed somewhat better than equities but still posted a negative return over the month. Yields were under upward pressure for much of the month as commodity prices rose fuelling concerns about the impact on inflation. Already elevated oil prices rose around 10% this month reaching the highest levels since 2014. The FTSE World Government Bond Index returned -1.2% over the month in US dollar hedged terms and the unhedged return was very similar at -1.1%.
US inflation rose again with the January print announced at 7.5%, the highest inflation the country has experienced for many decades. This pushed the Federal Reserve towards a more hawkish tone on inflation and the market moved to price in further expectations of higher interest rates this year. This led to a rise in yields and negative returns on US Treasuries of -0.7% over the month. Despite the increase in yields, US bonds remain relatively unattractive compared to other global bond markets according to our valuation approach. Given the commodity price backdrop and tight labour market following the easing of Covid-19 restrictions in the US, we believe that inflationary pressures are likely to persist albeit not at the same rate we saw in the year to January. Our inflation forecast for the forthcoming 18-24 months remains materially higher than the historical average of the decade before the pandemic.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Feb-2022.pdfJanuary, 2022
The fund returned -1.08% over the month, outperforming the benchmark which returned -1.54%. Bond selection added 0.35% 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Jan-2022.pdfDecember, 2021
Although the year ended with record Covid-19 cases attributable to the rapid spread of the omicron variant, investors sought encouragement in that the impact to global health and economic disruption may be less severe than originally feared. This shifted attention to the prospect of an improving global economic outlook and the policy reaction of global central banks to persistently higher inflation prints. For global bond markets, the rise in yields in December, and over the past year, reflected this backdrop. The FTSE World Government Bond Index returned -0.9% in US dollar hedged terms over the month, leaving the return for the year at -2.3%. In unhedged terms the index did slightly better for the month with a return of -0.6%, but the strength of the US dollar resulted in a full year return of -7.0%. The US Federal Reserve announced in December a doubling of the rate of tapering per month, essentially ending their Quantitative Easing programme in March 2022, two months earlier than expected. Projections are now for three interest rate increases in 2022, rather than one from September’s forward guidance. In the post-meeting statement the term “transitory”, which had been used to describe the increase in inflation, was removed. Inflation in the year to November was 6.8%. While the US Treasury market posted a modest gain of 0.3% for the quarter, performance for the year was negative at -2.3%. Even with a rise in nominal yields, our prospective real yield valuation for the US 10 year is at -1.3% and it remains one of the most unattractive bond markets in our global opportunity set. Eurozone inflation has also risen, from 1.3% in March 2021 to 4.9% in November, but economic recovery has been slower. Although the European Central Bank has argued for a more cautious approach in withdrawing stimulus it has indicated it will end its Pandemic Emergency Purchase Programme by March 2022. Meanwhile, Germany’s “traffic light” coalition government was finally formed. Fiscal policy will be closely observed as the coalition agreement contains an ambitious agenda for long term investment spending to modernise the economy in areas such as digital infrastructure and energy transition. While this suggests some openness to adjusting its selfimposed fiscal rules, debt discipline remains the primary principle. Eurozone bond markets sold off in December to generate a negative return over the quarter of -0.6% and a return of -3.5% for the year. Prospective real yields remain deeply negative in the region however, underpinning our underweight exposure. In the UK, the Bank of England hiked interest rates by 0.15% as inflation reached 5.1%, but gilts were the best performer in the index over the quarter, delivering returns of 2.8%, the UK market was the worst performer in the G7 over the full year however, returning -5.4%
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Dec-2021.pdfNovember, 2021
The fund returned 0.58% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Nov-2021.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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Oct-2021.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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Aug-2021.pdfJuly, 2021
The fund returned 0.94% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-July-2021.pdfJune, 2021
The fund returned 0.45% 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/2021/01/Colchester-Global-Government-Bond-Fund-Class-A-Jun-2021.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/2021/01/171429622-1.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/2021/01/170178548.pdfticker: ETL0409AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://colchesterglobal.com.au/our-funds/global-government-bond-fund/#fund-facts
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Global
peer_benchmark: Fixed Income - Bonds - Global Index
broad_market_index: Global Aggregate Hdg Index
structure: Managed Fund
fund_features:
Colchester Global Government Bond A aims to generate income and increase the amount invested by investing in a globally diversified portfolio of government bonds and currencies. Colchester does not guarantee the repayment of capital or the performance of the Fund or make any representation concerning any of these matters.
- 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.
- 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.
- Manager Address : GPO Box 804, Melbourne VIC 3001
- Phone : +61 3 9046 4040
- Website : https://colchesterglobal.com.au/
- Contact Email : pallen@colchesterglobal.com
- Contact Page : https://colchesterglobal.com.au/contact-colchester-global/