September, 2023
Despite cooling inflation and a strong start to the quarter, returns were mostly negative for fixed-income and equity markets, as rates reset to a “higher for longer” regime, bear steepening across developed markets. The strategy team materially reduced headline interest rate duration from 3 down to 1.5 early in the quarter, with underlying key rates reflecting a steepening bias. Positive performance for the third quarter was largely a result of the shift in interest rate duration, benefiting from both the decline in magnitude and curve positioning.
In credit, the strategy team focused sectoral shifts away from lower quality areas, namely reducing exposure to high yield bonds and emerging markets debt where valuations retraced meaningfully, capping further upside potential. Sectors most exposed to the trajectory of interest rates like credit risk transfer (CRT) and commercial real estate (CMBS) were also reduced, but the decline in recent months was mainly organic from a combination of tenders and calls. Conversely, the strategy team increased exposure to higher quality, more liquid areas such as AAA/AA-rated ABS/CLO, investment-grade (IG) corporates, and government bonds where the team still sees strong technical support and reasonably attractive yields in the current environment. Additionally, the strategy team believes the added benefit of liquidity in the IG market provides an opportunity to deploy capital back into higher yielding areas of the market in the event that valuations turn to more favourable levels.
All credit sectors contributed positively to performance for the quarter bar agency mortgage-backed securities which produced negative returns as rate volatility increased. Floating-rate risk assets outperformed fixed-rate, with securitised product the main source of positive performance from credit. Furthermore, core sectors benefited from improved carry (high levels of income) which represents a larger component of total return when compared to prior years.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2309.pdfAugust, 2023
The July U.S. Consumer Price Index (CPI) showed a second month of easing price pressures. Core CPI, which excludes food and energy prices, rose by just 0.16% but remains well above the Fed’s 2% target at 4.7% year-over-year. Declining commodity prices helped bring down headline inflation while services prices remained elevated. U.S. labour markets continued to exhibit resilience, with the unemployment rate declining to 3.5%. Stellar consumer spending data topped expectations following another rate hike in July, with retail sales rising by 0.7% in August, compared to 0.3% in July. Although cooling inflation and tight labour markets are fueling the possibility of a “soft landing” soon, in his much-anticipated remarks at the Jackson Hole Economic Symposium, Fed Chair Powell reinforced that there is still a long way to go to bring inflation down to the 2% target. Globally, economic data from other countries has not reflected the same resilience. The Euro area purchasing managers’ indices (PMI) indicated a contraction, with the composite PMI falling to 47. In addition, China continues to face headwinds to economic growth, with continued contraction in real estate activity and slumping export prices.
Fixed income total returns were mixed for the month of August as strong U.S. economic data drove rates higher in the first half of the month, however, weaker than expected U.S. data in the second half partially reversed the earlier moves. Securitised product was a top contributor to positive performance as the fund’s holdings benefitted from robust income generation. Furthermore, a handful of CMBS holdings were fully paid down at par, a price increase relative to prior discounted marks. High yield bonds also posted positive results for the month amidst improved investor sentiment on positive economic growth. Emerging markets debt returns were negative in August due to rising yields and softer economic data in China affecting sentiment. In terms of positioning, the strategy team continued its de-risking program, targeting areas such as emerging market debt, which would likely be vulnerable to higher energy prices and Eurozone weakness.
The strategy team is less constructive on high yield bond valuations, and thus reduced exposure in that space as well. The team continued to invest risk reduction proceeds in higher quality parts of CLO and consumer ABS to not overly erode current income, preserve optionality in these more liquid areas, and offer protection from adverse outcomes in the most senior part of the capital stack.
Current fixed income valuations appear to be more consistent with a “soft landing,” and even a reacceleration in growth as opposed to a near-term recession. If the market accepts the notion of accelerating growth, then Fed rate cuts expected in 2024 can likely be called into question and inflation expectations may increase. This could signal that the Fed is behind the curve and if rates move higher, risk assets could suffer. Thus, the balance of risks today does not seem to reward an elevated degree of interest rate duration nor credit risk premium duration. As a result, the fund remains more defensive, skewed toward higher quality segments of corporates, emerging markets, and securitised product with a reduced exposure to interest rate duration.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2308.pdfJuly, 2023
The U.S. Consumer Price Index (CPI) slowed to 3.0% year-over-year due to falling energy prices, but core CPI, which excludes food and energy prices, remains elevated at 4.8%. Labour markets are especially resilient as the unemployment rate decreased to 3.6% in July, near its cycle low. The Federal Open Market Committee (FOMC) hiked interest rates in July, bringing the federal funds rate target range to 5.25%-5.50% and leaving the door open for possible hikes later in the year if inflation fails to head back toward the 2% target. In reflection of a stellar job market, the U.S. economy grew at a 2.4% annualised rate from the previous quarter. Globally, the fight against inflation continues. The euro area also saw good news in inflation as the Harmonised Index of Consumer Prices (HICP) slowed to 5.5% year-overyear. Like the U.S., however, services prices remain elevated, and the unemployment rate reached a record low. As a result, the European Central Bank (ECB) hiked rates by a quarter percentage point. The Bank of Japan (BOJ), on the other hand, decided to retain its basic yield curve control framework. The Japanese central bank will still target long-term yields at 0% but will allow 10-year government bond yields to float up to 1.00% from 0.50% previously. Like other central banks, inflation drove the BoJ’s decision after June headline inflation readings rose back to 3.3% year-over-year.
The month of July was largely positive across the board as risk assets rallied on a combination of stronger U.S. economic data, solid second-quarter corporate earnings, more benign headline U.S. inflation data, and a relatively patient Federal Reserve (Fed). In particular, spreads broadly declined across corporate credit, emerging market debt, and securitised product. Front-end developed government bonds lost some ground due to stronger-than-expected 2023 global GDP forecasts. In terms of positioning, the team reduced credit risk and will likely be reducing credit risk further. This risk reduction has been focused in areas that represent larger positions, like emerging markets debt, which would likely be vulnerable to higher energy prices and Eurozone weakness. In addition, the team is not constructive on high yield corporate valuations in the US and Europe and consequently reduced high yield corporates as well. The team invested risk reduction proceeds into higher quality parts of CLO and consumer ABS to not overly erode carry, preserve optionality in these more liquid areas, and offer protection from adverse outcomes in the most senior part of the capital stack.
The combination of shifting sentiment in recent months and asset price trajectory strongly suggests a soft landing (from the Fed) is largely priced into fixed-income markets. The fixed-income market appears to be signalling that cyclical inflation is in the rearview mirror and growth/earnings will normalise in the next 12 to 18 months, alongside Fed easing and US equity multiple expansion. If rates move higher from here, risk assets should suffer as correlations become more positive and the easing of financial conditions is dampened. Ironically, more growth (not less) could set-up the economy for a hard landing. This scenario does not appear to be priced into financial markets and the strategy team believes it to be a reasonably plausible outcome that needs to be considered. Thus, the balance of risks does not seem to reward an elevated degree of interest rate duration nor credit spread. The Fund remains more defensive, skewed toward higher quality segments of corporates, emerging markets, and securitised product with reduced exposure to interest rate duration.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2307.pdfJune, 2023
The second quarter began with a hangover from the banking crisis in March. Investors then shrugged off fears of further bank failures and shifted their focus back to unyielding inflation with global central banks either hiking short-term rates in 25-50 basis point increments or advising the increased likelihood of further hikes on the horizon.
On average, global developed market bond yields increased nearly 1% for maturities within 5 years on fears of further rate hikes. Commodities were also less fortunate with gold, oil, copper and iron ore prices markedly lower in the second quarter.
Ultimately, financial markets experienced a euphoric quarter posting positive excess returns. Corporate, emerging market debt, and broadly non-agency securitised product spreads compressed on average between 15bp to 55bps. Floating-rate asset classes such as CLO and loans benefited from higher interest rates posting the best performance in the first half of the year since 2011.
The relatively resilient economic backdrop continued to be supportive for corporate fundamentals, with performance of lower quality segments of the market (CCCs) outperforming higher quality bonds (BBs). For a similar reason, residential mortgage credit benefited due to a combination of positive technical tailwinds and investor expectations that the Federal Reserve (Fed) is nearing the end of its hiking cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2306.pdfMay, 2023
Financial markets were swayed throughout May by two crucial issues: debt ceiling negotiations and enduring inflationary pressures. Initially, yields on U.S. Treasury bills maturing near the expected debt ceiling "X-date" almost reached 7% before retreating once an agreement to raise the debt ceiling appeared. Concurrently, the high U.S. inflation rate, highlighted by a 4.7% core PCE in April, worried investors as goods prices unexpectedly increased. Responding to persistent inflation, Federal Reserve officials increased the federal funds rate target to 5.00-5.25%, the highest since August 2007. The U.S. was not alone in battling inflation, with U.K. core inflation rising the fastest since 1992. Some cracks have appeared due to the monetary policy tightening over the last year. For example, the German economy contracted in the first quarter by -0.3%, making this the second consecutive quarter of contraction. Still, the service sector expanded globally in May, with the global services purchasing managers index (PMI) rising to 55.5, indicating a healthy expansion continues.
Returns in fixed income markets struggled during the month of May due to heightened levels of volatility due to U.S. debt ceiling concerns, resulting in higher U.S. Treasury yields and wider spreads in the U.S. high-yield corporate market. The rate selloff dragged almost all segments of global credit to negative returns for the month. High yield bonds ended the month in negative territory for the fifth time since the depth of the pandemic.
Within emerging market (EM) sovereigns, high-yield rated issuers outperformed investment-grade issuers, although in EM corporates investment-grade issuers slightly outperformed. EM local markets lagged hard currency as most currencies depreciated against a stronger U.S. dollar, reflective of relatively strong US economic data prints in May. The Fund’s securitised holdings primarily delivered positive performance for the month, with subprime autos and residential mortgage credit among the top performers. In terms of portfolios positioning, secured consumer ABS remains the only area within securitised where the strategy team is sourcing exposure down the capital stack. Additionally, the strategy team has rotated up-inquality within credit risk transfer (CRT) to further reduce risk in the sector.
The outlook for fixed-income assets appears to be more balanced as recently uncovered financial sector risks suggest that central bank tightening has reached late stages. That said, the market transition from inflation to growth and financial stability is likely expected to accelerate in the coming months if Fed policy remains restrictive. The Fed may prioritise financial stability and avoidance of a deep recession, particularly heading into an election year. With the risk of recession rising, the strategy team remains more defensive, skewed toward higher quality segments of corporates, emerging markets, and securitised product. Additionally, interest rate duration is playing a more prominent role in portfolios today with a portfolio duration of 3.0, well above the historic duration range between 1.0 and 2.0.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2305.pdfApril, 2023
In April, financial markets faced turbulence due to two primary factors: persistent concerns about the banking system's stability and the looming U.S. debt ceiling issue. First, the collapse of another major bank in April dashed hopes that the previous month's bank runs were isolated incidents. Although markets have downplayed systemic risk concerns as the FDIC and Federal Reserve continue to offer support, potential hazards persist. Second, bond investors' apprehension over the debt ceiling is reflected in the significant yield spread between generic 1-month and 3-month Treasury bills. This disparity highlights investor preference for bills maturing within the next month and their reluctance to engage with those expiring around when the Treasury might face a cash crunch this summer (if the debt ceiling is not raised).
Despite ongoing market concerns in April, returns were positive across most fixed-income markets, with income being the primary driver of returns and spreads mostly flat. Global credit returns stayed positive overall, while the US dollar and commodities broadly underperformed in April. The strategy team took advantage of the more sanguine market environment by reducing less favorable IG corporate names. Emerging market returns were broadly positive driven by income and rates, with continued gains in local EM and FX. The team is currently looking to add more local opportunities across various regions
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2304-2.pdfFebruary, 2023
In February, economic data releases alleviated recession concerns in the near term. The U.S. economy saw a robust January jobs report, with the unemployment rate falling to a cycle low of 3.4% and consumer spending remaining well above trend. In addition, the Chinese and euro area economy saw a sharp rise in their Purchasing Managers Indices, specifically with their service sectors returning to expansionary territory. The flip side of a continued economic recovery is that inflation is stickier than most investors expected at the start of the year. In the U.S., core PCE (the Fed’s preferred inflation measure) rose to 4.7% year-over-year in January, rising 0.6% month-over-month. In the euro area, core CPI rose 5.6% year-overyear in February, a record high. Unsurprisingly, market expectations of the “terminal” policy rate in both economies rose. In the U.S. and the euro area, the market-implied terminal fed funds rate was 0.5% higher at the end of February compared to January.
February’s fatigue was a sharp contrast to January’s bliss. Risk assets broadly produced negative total returns for the month as continued inflationary pressures and concerning data releases pushed interest rates higher and spreads mixed. Floating-rate securities outperformed fixed, with securitised broadly outperforming corporates and emerging market debt in February. Despite overall market weakness, primary markets were open and in some cases allowed issuers to refinance near-term maturities, a good sign for market liquidity.
For investment-grade corporates, the most active February issuance on record weighed heavily on spreads which widened 5-10 basis points. In terms of activity, the fund team further reduced loan exposure and subordinated CLO (BBB/BB) as risks continue to increase for rising loan defaults and downgrades.
Given the significant rise in U.S. Treasury yields (0.3%-0.6% higher in February), the fund team increased interest rate duration by +0.5 to 2.4, and bond exposure more skewed to fixed-rate securities. From a credit standpoint, the fund remains more favourable toward a combination of corporate credit, emerging markets debt, and government securities for the enhanced liquidity profile and attractive all-in yields of fixed-rate assets. The fund team’s focus has been to reduce overall credit risk given the rally to start the year and fatter tail risks associated with persistent inflation, continued monetary policy tightening, and trajectory of economic data prints. To address risks of a hard landing, the team has implemented macro hedges via puts on Nasdaq futures and calls on TLT (20+yr U.S. Treasuries).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-2302.pdfJanuary, 2023
In January, the U.S. GDP for Q4 2022 showed that the economy continued to expand at a 2.9% annualised rate, closing out the year with the U.S. economy expanding 1.0% in 2022. In addition, the December jobs report showed that the unemployment rate declined to 3.5% while initial claims for unemployment insurance remain subdued, despite the layoff announcements that grabbed headlines. After dealing with an energy crisis and the spillovers from the war in Ukraine, the Euro Area economy also expanded in the fourth quarter. Declining energy prices after a warmerthan-expected winter meant that euro area consumer sentiment improved, as seen by the service sector PMI which returned into expansionary territory (50.8) after being in contraction for most of the second half of 2022. China began reopening the economy after a year of the “zero-covid” policy. Financial conditions continued to ease ahead of the Federal Reserve meeting that began on the last day of the month.
The Fund team was leaning more constructive on credit risk for the balance of 2022 and into the first quarter of 2023. Recession fears had become too consensus at the end of last year, but in recent weeks the market responded accordingly with a dramatic shift to price in a goldilocks scenario for the Fed. While lower bond yields offset what appeared to be broadly weaker economic growth data, credit risk premiums declined across most asset classes, with Emerging Markets Debt and Corporates leading the pack. Given the significant move in both rates and risk premia, the Fund team reduced credit risk by about 20-30%. The reduction in risk is consistent with the team’s prior narrative to further reduce Securitised exposure in favour of Emerging Markets and Corporates as areas of Securitised are most vulnerable if rates stay higher for longer. In ABS, the team has taken steps to monetise exposure added at the end of 2022 as spreads declined 100bps+ from their peak close to 400bps, particularly in prime and subprime Autos.
In Emerging Markets, the supply spigot was turned on from a very dry 2022, and the Fund team participated in many new deals as the primary market offered healthy concessions that led to positive performance, particularly in the tactical bucket.
The tail risk associated with an overly hawkish Fed, wage price spiral, and near-term recession have been largely removed from the market. The Fund team struggles to see a significant catalyst in credit, especially if the market is relying on further Fed dovishness and cuts to be the main driver for risk assets going forward. The bottom line is spreads could tighten further, but the current balance of outcomes is more fair, if not skewed toward downside versus the upside the team identified at the end of 2022. As a base case, the Fund team will likely reduce risk another 10-20% commensurate with further credit spread tightening of 10-15%, on average, across spread sectors. As the market focus shifts from inflation to growth, correlations should normalise and therefore duration will provide better balance in a credit portfolio when compared to 2022. Thus, the team expects duration to remain elevated relative to 2022, but will be mindful of ranges. We plan on keeping liquidity elevated for the foreseeable future, especially given investors are paid to wait, with areas like short-term U.S. bills yielding circa 4.5%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2301-1.pdfDecember, 2022
The fourth quarter was a bright spot in one of the most challenging years for fixed income performance over the past decade. Market participants embraced the subtle shift in Fed monetary policy and China reopening with credit markets producing positive returns. Despite late December weakness, corporate credit spreads compressed for the quarter marking the best quarterly excess returns for the year on improved risk sentiment. Prospects of China reopening (and growth re-acceleration), and less policy uncertainty benefited emerging markets debt (EMD) performance to cap the year, outperforming corporate credit for the quarter. Momentum from fundamentals improving, asset class outflows abating, and still attractive valuations are all constructive for EMD going forward.
Securitised performance was broadly positive, driven by collateralized loan obligations (CLO) which were highly correlated with corporate credit performance and credit risk transfer (CRT) which benefited from a ~1% decrease in US mortgage rates. Select collateral types within asset-backed securities (ABS) struggled to keep up with broader markets, in particular railcar, subordinated tranches of subprime autos (BB-rated), and auto residuals.
Early in the quarter, the fund team took profits on 1% of the BB US corporate exposure added in September as high yield corporate yields relative to U.S. Treasuries tightened by about 1%. The fund utilised HY CDX throughout the quarter to efficiently manage credit beta as credit spreads oscillated. Near the end of the quarter, the team added marginally in the cash bond space.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2212.pdfNovember, 2022
The U.S. Federal Reserve raised its key policy rate by 75 basis points for the fourth consecutive meeting in November, bringing the Fed funds rate to 3.75-4.00%. The Fed also signaled that a slower pace of rate hikes (i.e., 50 basis points per meeting) might be appropriate as soon as the December FOMC meeting. The October Consumer Price Index report bolstered the case for a step down in the pace of rate hikes, showing softer-than-expected consumer price inflation during the month. Equity and credit markets cheered the subtle shift in monetary policy, with investment-grade corporate spreads tightening by 25 basis points in November. Across the pond, in the United Kingdom, inflation accelerated to 11.1%, the fastest pace of price increases in more than four decades. China's Covid-19 cases reached a daily record with a lot of confusion regarding the country's lockdown policy looking ahead. Meanwhile, J.P. Morgan's Global Composite PMI fell to 48 in November, the lowest reading since June 2020, a sign of slumping economic growth.
Credit risk premia continued to tighten in November while U.S. Treasury yields rallied on the heels of a cooling CPI print. Within corporates, the Fund reduced its CDX HY protection by 5% and added marginally in the cash bond space. Within IG corporates, the Fund has been active in the primary market, taking advantage of new issue concessions. Subsequently, we have taken profits on some of the recent outperformers and higher beta names that had traded through recent tights. Within securitised product, dispersion is likely to increase across collateral types. We viewed recent spread weakness in subprime auto ABS as an attractive opportunity to add 1- 2% in additional exposure given the robust structural protections, de-levering nature, and no recession expectations until at least H2 2023. Within CLO, we took the opportunity to reduce on the margin into recent strength. Liquidity remains elevated in the event that we see further buying opportunities in the near term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-2211.pdfOctober, 2022
The yield on a three-month Treasury bill rose above the yield on a 10-year Treasury note in October, sparking chatter about "yield curve inversion" and recession. However, Q3 U.S. GDP grew at a 2.6% annual rate, making up for the first-half decline in output. Inflation readings globally rose further in developed economies, with U.S., U.K., euro area, and Canadian statistical agencies all reporting September inflation readings that topped expectations, again confounding hopes of a downshift in price pressures. Bucking the inflation trend, European natural gas prices declined to below €100 per MWh due to expectations of a mild winter and high storage levels. In China, the Central Committee of the Communist Party elected Xi Jinping for a historic third term. The storm in U.K. gilt markets abated as the tax cut policy was rescinded, and former Chancellor of the Exchequer, Rishi Sunak, was elected as the next Prime Minister after Liz Truss resigned on October 20th. Meanwhile, the Bank of Canada surprised markets by raising rates by 50 basis points to 3.75%.
Broadly speaking, credit risk premia rallied during the month of October, although total returns were negatively impacted by rising rates as the market priced in further Fed hawkishness on the heels of strong labour market data and an upside surprise to CPI. Within corporates, the Fund took profits on 1% of the BB exposure added in September as high yield corporate yields relative to U.S. Treasuries tightened by 100 basis-points. The Fund’s allocation to EM also benefited from the broader risk-on tone. The Fund reduced its CLO allocation by 2% focusing on Euro-denominated, lowerquality exposure. Within ABS, we increased exposure to auto collateral given the recent weakness where all-in-yields, short duration nature, and structural protections provided attractive entry. Broader securitised product underperformed partly due to its lagged performance relative to more liquid risk markets. Liquidity remains elevated in the event that we see further buying opportunities in the near term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2210.pdfSeptember, 2022
September brought a slew of global central banks raising rates to combat inflation. Almost every major central bank raised rates during September, except for the Bank of Japan. The European Central Bank raised rates by 75 basis points, followed by a 50 basis points increase by the Bank of England and a third consecutive 75 basis point increase by the Federal Reserve. The median Fed policymaker sees rates at 4.25%-4.50% by year-end. Central bank rate hikes have resulted in the worst start to a year on record for bond and 60/40 “balanced” portfolios. As global central banks raised rates, the U.S. dollar strengthened against other currencies. Fears of fiscal profligacy due to the new U.K. government’s proposed tax cuts led to the largest daily move in 10-year U.K. gilt yields on record, which caused the Bank of England to step in “to restore orderly market conditions.” The War in Ukraine took another turn, with Russia staging referendums to formally annex the Eastern provinces of Ukraine. There were also leaks from underwater explosions of the Nord Stream 1 and 2 gas pipelines that supply Russian gas to Europe. Finally, hurricane Ian made landfall on Florida after hitting Cuba, resulting in power loss and flooding
September was a challenging month for risk assets in the face of higher than expected inflation prints and a devotedly hawkish Fed. As a result, Treasury yields sold off, credit risk premiums widened, and equity indices retested their lows of the year, bringing the summer rally to a halt. As US HY BB corporate yields relative to government bonds increased by 100 basis-points, the fund added roughly 2% in the BB space with all-inyields close to 8%. Within the credit risk transfer market, the fund has remained disciplined in new issue participation where there is less embedded home price appreciation, favoring 2020 and prior vintages. We maintain elevated liquidity in the event that further volatility creates attractive buying opportunities in the near term. Investment Grade – JBS USA, Citi High Yield – OneMain Financial.
The Fund looks to upcoming growth and inflation data to better inform our view on the distribution of outcomes going forward. However, a “soft landing” is not our base case given the resilience of the labour market, thus increasing the magnitude of Fed tightening. The Fed is likely to continue on its path of tightening financial conditions until there is evidence of balance in labour market, below trend growth, and softening of inflation towards the Fed’s two-percent long run target. Volatility in rates and risk assets could remain heightened until there is more clarity on the trajectory of these factors.
The Fund broadly maintains its preference for securitised product due to the structural protections, however, there is increasing nuance in the relative value of collateral types due to recent dispersion across asset classes and collateral performance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2209.pdfAugust, 2022
The summer reprieve for risk assets is over. In August, Federal Reserve (Fed) officials reiterated that the central bank's primary objective is to stop inflation, even if doing so means a higher unemployment rate. The clear message from policymakers upset equity and bond markets at the end of the month. Meanwhile, the economic data continues to be mixed. On the one hand, forward-looking indicators of growth and sentiment, such as the Purchasing Managers' Indices (PMI) and the Conference Board's Leading Economic Index, pointed to an economic contraction. On the other hand, labour market data showed continued strength, with 315,000 net new jobs added in August and more than 700,000 workers returning to the labour force. Inflation data was similarly mixed. July inflation data released in August revealed that the headline consumer price index (CPI) decelerated to 8.5% year-over-year, mainly due to falling energy prices. However, core inflation, which excludes food and energy prices, remained sticky at nearly 6% year-over-year for the seventh consecutive month. President Biden signed the Inflation Reduction Act into law, which aims to reduce the deficit by $300 billion and includes a tax on stock buybacks with $369 billion earmarked for domestic energy and climate change. Europe faced exorbitant energy prices amidst Russia's slowdown in natural gas exports to Europe. Meanwhile, the IMF approved loans of $2.9 billion to Sri Lanka and $1.1 billion to Pakistan. Separately, Pakistan faced devastating and deadly floods after a heavy monsoon season.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-2208.pdfJuly, 2022
The U.S. Consumer Price Index (CPI) grew 9.1% over the 12-month period ending in June and core and trimmed-mean measures remained well above the Fed’s target. As a result, the Federal Open Market Committee (FOMC) hiked interest rates again by 75 basis points at their July meeting bringing the target range for the federal funds rate (FFR) to 2.25-2.50% - the Committee’s estimate of the long run “neutral” rate and the peak of the previous cycle. The Federal Reserve’s (Fed) monetary policy tightening is continuing to impact the broader economic landscape. For example, although firms added 372,000 jobs in June, job growth according to the household survey has been negative in two of the last three months. Also, GDP growth for the second quarter was negative, contracting at a 0.9% annualised rate from the previous quarter.
Global central banks are moving quickly to keep up with the Fed’s pace of hikes as a strengthening dollar is causing headaches abroad. After the euro reached parity with the dollar for the first time in two decades, the ECB hiked its policy interest rates by a half percentage point, pushing the deposit rate to zero after spending nearly a decade in negative territory. European central bankers may not be able to deliver on the hikes they’ve signalled, however, as monetary policy transmission is already facing fragmentation
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-2207.pdfJune, 2022
Risk assets continued to struggle in Q2, resulting in the worst H1 in decades across many fixed income and equity markets. Recessionary concerns further mounted as economic activity indicators pointed to a lower-than-expected growth trend for the remainder of the year and into 2023. Additionally, the most recent inflationary data shows an uptick in price pressures, challenging the narrative that we are past “peak” inflation.
The FOMC hiked rates by 75 basis points at their June meeting due to latebreaking inflation and consumer sentiment data which showed an acceleration in prices and a jump in inflation expectations. The Summary of Economic Projections (SEP) showed the median member expected the federal funds rate (FFR) target range to reach 3.25-3.50% by year-end, increasing the risk of recession, especially in interest rate sensitive sectors like housing and autos.
Continued inflationary pressures, central bank hawkishness, and the global growth trajectory are expected to keep weighing on investor sentiment. Our base case is that the Fed remains in “inflation-fighting” mode and is not likely to change its course of action as a result of recent volatility. The Fund looks to upcoming growth and inflation data to better inform our view on the distribution of outcomes going forward, but the likelihood of a “soft landing” is diminishing. In the near term, while further weakness is likely the path of least resistance as financial conditions tighten and global growth slows, we remain cautiously optimistic given the strong starting point in corporate and consumer fundamentals. The U.S yield curve steepened to start the quarter, but the 2yr/10yr yield differential reverted to almost flat as further growth concerns priced into the market. The Global Aggregate index returned -8.26% in Q2, while the U.S.
Aggregate returned -4.69%, both impacted by the increase in government yields as well as the yields relative to government bonds. Equity markets reported a weak performance for the quarter, with value stocks (MSCI Value Index -12.21%) significantly outperforming growth stocks (MSCI Growth Index -21.41%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Quarterly-Fund-Update-2206.pdfMay, 2022
At the beginning of May, monetary policymakers at the Fed raised the federal funds rate (FFR) by 50 basis points, pushing the target range to 0.75%-1.00%. Markets rallied on the news because Fed Chair Jerome Powell took the potential for a 75-basis-points hike off the table at the post-meeting press conference.
Inflation data for April released in May also showed that headline readings may have peaked, coming down slightly on a year-over-year basis from 8.6% to 8.2%. However, core (ex. food and energy) readings are likely to remain well above the Fed’s 2% target due to the rising cost of shelter. Additionally, a record-tight labour market will make the Fed’s job of delivering a soft landing more challenging as continued gains in employment and wages will bolster demand. Mortgage rates are up over two percentage points since the start of the year, which has caused the pace of home sales to slow and housing inventory to jump.
If new home construction starts to falter, we could see members of the Federal Open Market Committee (FOMC) opt to pause rate hikes in the fall. Policymakers at the European Central Bank (ECB) began signaling that they would begin hiking interest rates soon. In a blog post published towards the end of the month, ECB president Christine Lagarde communicated that it would be appropriate for the central bank’s policy rate to exit negative territory before year-end. May started off with a heavy risk-off tone due to the concerns over inflationary pressures, monetary tightening, and the continued zero-Covid strategy in China.
Notably, heightened concerns regarding the growth outlook developed, however sentiment reversed its course as the aggressive path of interest rate hikes came under question. During the mid-month weakness, the Fund added on the margin in areas like investment grade corporates and higher quality areas of securitised, spending down some of the cash on hand. Securitised product underperformed, lagging the broader retracement in risk assets, and continues to look attractive given the structural protections and strength in underlying collateral. Investment Grade –KeyCorp, Willis North America Emerging Markets – Kallpa Generacion Securitised.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2205-1.pdfApril, 2022
Jobs data released on the first of April revealed that 431,000 new jobs were added to nonfarm payrolls in March, dropping the unemployment rate by 0.2 percentage points to 3.6%. Inflation readings also reached new highs with the headline Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) gauges printing at 8.5% year-over-year and 6.6% year-over-year, respectively.
Core and trimmed mean measures are lower yet remain well above the Federal Reserve’s (Fed) 2% target. As a result of labor market strength and rising inflation, we revised our forecast for the federal funds rate (FFR) at year-end from 2.25% to 2.50%. We now expect the Federal Open Market Committee (FOMC) to “front load” hikes by raising the FFR by 50 basis points at each of the next three meetings. The advance estimate for first-quarter GDP revealed that the U.S. economy shrank at a -1.4% annualized rate largely as a result of a ballooning trade deficit that detracted 3.2 percentage points from headline growth. Despite the negative GDP reading, the U.S. consumer remains strong as demonstrated by the increase in the consumer spending category.
The International Monetary Fund (IMF) revised down their forecasts for global growth in 2022 as a result of the war in Ukraine, which is roiling commodities markets, and China’s restrictive zero Covid policies, which that have shut down major metropolitan cities.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2204.pdfMarch, 2022
Risk assets had a challenging start to the year with plenty for market participants to focus on. The geopolitical climate remains tense as Russia’s invasion of Ukraine persists. Russia’s actions have been met with coordinated responses from global players, both sovereign and corporate, in various forms of sanctions. While the medium-term effects on global growth and inflation are uncertain, it is likely that the shock to global trade will put further upward pressures on prices as we are already seeing in in certain commodities.
In the U.S., inflation data showed that consumer prices continued to rise in February at a rapid rate with 0.8% growth on the month and 7.9% growth year-over-year, notably before any impact of the Russia/Ukraine conflict. In March, the Federal Reserve ended its purchase program and began its hiking cycle with a 0.25% lift-off of the Federal Funds Target Rate. Our base case is that the Fed remains in “inflation-fighting” mode and is not likely to change its course of action as a result of recent volatility. We continue to look to upcoming inflationary data to better inform our view on the distribution of outcomes going forward. The U.S yield curve flattened during the quarter with the first inversion of the 2yr/10yr yield differential since 2019. The Global Aggregate index returned -6.36% in Q1, while the U.S. Aggregate returned -6.00%, both significantly impacted by the increase in government yields as well as the yields relative to government bonds. Equity markets reported a weak performance to start the year, with value stocks (MSCI Value Index -1.25%) significantly outperforming growth stocks (MSCI Growth Index -9.80%)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Quarterly-Fund-Update-2203.pdfFebruary, 2022
Despite mostly upbeat economic data, February was a volatile month for markets. Early in the month, revisions to the jobs data revealed that job growth had been much more consistent throughout 2021 than previously thought, helping to explain the Federal Reserve’s (“Fed’s”) seemingly rapid pivot towards tightening monetary policy. Inflation data also showed that consumer prices continue to rise at a rapid rate with 0.6% growth on the month and 7.5% growth over the last 12 months. Several regional Fed presidents and Board of Governors member Christopher Waller have come out in support of increasing the Fed’s policy rate to 1% by mid-year, which caused the yield on the 10-year U.S.
Treasury to climb above 2.0%. U.S. Treasury yields fell, however, after Russia launched a full-scale invasion of Ukraine late in the month. While we still expect six hikes from the FOMC this year, the Committee will likely start with a 0.25% hike at their upcoming meeting on March 16th and wait until June to begin shrinking their balance sheet. The conflict in Ukraine has already impacted oil and wheat prices, and it will likely hurt euro area economies more than the U.S. economy. As a result, prominent members of the European Central Bank (“ECB”) have signaled they would like to exercise more patience on monetary policy decisions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Monthly-Fund-Update-2202.pdfJanuary, 2022
Jobs data released in the first week of January revealed that the unemployment rate continued to decline in December, dropping to 3.9%. Consumer Price Index readings also showed that inflation in the U.S. picked up through year-end 2022, reaching its highest headline readings in nearly 40 years (7% year-over-year). Meanwhile, daily Covid-19 cases shattered records in the U.S. and worldwide as the more contagious Omicron variant spread, exacerbating labor supply issues. Despite the Covid snags, the economy grew at a 6.9% quarter-over-quarter annualised growth rate in the fourth quarter thanks primarily to growing inventories, which accounted for five percentage points of the annualised figure. Seeing a strong labor market and troublesome inflation, the Federal Reserve signaled they would begin hiking their policy interest rate in March and let their balance sheet begin to “roll off” soon after. We now anticipate a total of six 25-basis-point rate hikes in 2022, with a hike coming at every FOMC meeting except November’s.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2201-1.pdfDecember, 2021
In Q4 of 2021, the Federal Open Market Committee (“FOMC”) announced the tapering of their monthly asset purchases at their November 3rd meeting, initially at a rate of $15 billion per month. Consumer prices in the U.S. reached multi-decade highs with a year-over-year headline CPI reading of 6.8% in November, surpassing October’s 6.2% print. At the December FOMC meeting, the Committee increased the pace of tapering to $30 billion per month. Additionally, the median rate projection from the Fed dot plot of forecasts now suggests three 25 basis point hikes during 2022. Coupled with Powell’s hawkish commentary and relaxation of the test stringency for rate lift-off, we now view the market’s expectations for three rate hikes in 2022 as feasible. Adding to investor concern and market volatility during the quarter was the emergence of the Omicron strain of the Covid-19 virus which has now spread globally after being first discovered in South Africa. While its impact on global economies is still too early to tell, data on the Omicron variant has continued to suggest that it is a more transmissible strain of the virus, however deaths and hospitalisations remain much lower relative to previous waves. The U.S. yield curve flattened with the U.S. 30-year bond lowering, ending the year at 1.90%. Risk assets experienced some volatility during the quarter, with the Global Aggregate Index returning -0.89%, while the U.S. Aggregate Index posted a modest negative return of -0.14%. Equity markets reported a strong performance to end the year despite intra-quarter volatility, with value stocks (MSCI Value Index +6.6%) underperforming growth stocks (MSCI Growth Index +8.5%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Monthly-Update-as-of-2112.pdfNovember, 2021
The Federal Open Market Committee (“FOMC”) announced the tapering of their monthly asset purchases at their November 3rd meeting, initially at a rate of $15 billion per month. Federal Reserve (“Fed”) Chair Jerome Powell was renominated to lead the central bank later in the month. Consumer prices reached 30-year highs in October, with the headline CPI reading reaching 6.2% year-over-year, causing bond markets to begin pricing in two-to-three rate hikes for some time next year. Trimmed-mean and median measures of inflation also picked up. Despite a healthy 531,000 jobs being added to payrolls in October, the overall employment level and labor force participation remain suppressed compared to pre-Covid levels. This Fed has pledged to enforce an incredibly stringent test for rate hikes that relies on reaching “maximum employment” if inflation expectations remain anchored. Sure, the Fed could hike in 2022, but they’d need to perform a U-turn on their guidance or inflation expectations need to move a lot higher. Lastly, the new Omicron variant roiled financial markets towards the end of the month. Although it’s too soon to conclude whether the variant will drastically change the economic outlook, the FOMC may use it as a rationale for keeping the pace of tapering on its current trajectory. November was marked by a risk-off tone as markets priced in an accelerated timeline for monetary tightening by the U.S. Fed, followed by concerns over a new, and possibly more transmissible, Covid-19 variant emerging out of South Africa. Securitized product was the clear outperformer of the month despite the heavy supply and rate volatility. Credit risk transfer B2s mostly recovered October’s decline, much of which was driven by heightened issuance expectations with Fannie Mae re-entering the market. The Fund took advantage of weakness in emerging markets debt by adding exposure in the front-end.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/2111-PTGEF-Monthly-1.pdfSeptember, 2021
In Q3 of 2021, the U.S. economy continued to recover, albeit at a slower pace due to a wave of Covid-19 Delta variant cases. Fortunately, as new cases increased globally, hospitalisations and fatalities did not increase as severely as prior waves now that over 3.5 billion people have received at least the first dosage of the vaccine. After August’s year-over-year headline and core CPI readings came in lower than the months prior at 5.2% and 4.0%, respectively, investor attention shifted towards monetary policy and the September Federal Open Market Committee (FOMC) Conference, where we saw a an increasingly hawkish tilt. We now can reasonably expect to see tapering begin at the November meeting unless we experience disappointing employment numbers over the coming months.
The yield on the U.S. 30-year bond is now back above 2.00%. Risk assets experienced some volatility during the quarter, with the Global Aggregate index returning -0.89%, while the U.S. Aggregate index posted a modest return of 0.05%. Equity markets reported mixed performance in the third quarter, with value stocks (MSCI Value Index -0.7%) underperforming growth stocks (MSCI Growth Index +0.8%) despite significantly outperforming throughout a shaky September
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2109.pdfAugust, 2021
Despite rising Covid-19 cases and concerns of a slowing economic recovery, August was a good month for economic data. Nearly a million jobs (+934,000) were added to nonfarm payrolls in July bringing the unemployment rate down by half a percent to 5.4%. Year-over-year growth in consumer prices appeared to stabilise, with headline CPI staying flat at 5.4% and core CPI coming down slightly to 4.3%. The Fed’s preferred inflation gauge, core PCE, was more subdued at 3.6% year-over-year for July. Federal Reserve Chair Jerome Powell spoke at the virtual Jackson Hole Economic Symposium at the end of the month, sharing that the Committee felt “it could be appropriate to start reducing the pace of asset purchases this year” if the economy performs as expected. The August jobs report, which comes out in the first week of September, will be a key determinant of whether the Committee announces a taper at their next meeting.
Finally, we revised our forecast for U.S. growth in 2021 down to 6.2% because of slower than anticipated growth in the second quarter (6.6% versus expectations of ~9%). We believe we will still see strong growth through year-end (~6% annualised), but Q2 was likely the “peak.”
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2108.pdfJuly, 2021
The economic data released in July continued to show the challenges of reopening. Despite adding 850,000 jobs to nonfarm payrolls in June, the unemployment rate increased slightly to 5.9%. Supply bottlenecks combined with strong demand for goods continued to push consumer prices higher, with headline and core CPI reaching 5.4% and 4.5%, respectively. The Fed’s preferred inflation gauge, core PCE, was more subdued at 3.5% year-over-year for June. The FOMC clarified their willingness to tolerate price increases by expounding on their definition of “transitory.” According to Chair Powell, “transitory” does not necessarily mean prices will reverse in short order, but rather the current increases won’t have a lasting impact in the form of higher expectations for future inflation.
Gross domestic product data released at the end of the month revealed that the U.S. economy grew at a 6.5% annualised rate in June, missing expectations of near double-digit growth due to the depletion of inventories. The miss was bittersweet, however, because it signaled that the U.S. might grow at a faster rate than initially predicted in the second half of the year as companies replenish their stockpiles. Finally, the month of July saw the broader emergence of the Delta variant in the U.S. Many large municipalities, such as Los Angeles, reimposed indoor mask mandates for all individuals regardless of vaccination status but stopped short of imposing more substantial restrictions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2107.pdfJune, 2021
In Q2 of 2021, despite a downside unemployment miss in May, the U.S. economy continued to recover, with over half of the nation’s population now having received at least one dose of the vaccine as restrictions continue to lift. Globally, vaccinations have now surpassed 3 billion, however some countries such as Israel and Australia have experienced hinderances to their recovery trajectories due to the new Delta variant leading to further lockdowns.
The market shifted much of its attention to inflationary pressures after last month’s record year-over-year core PCE inflation print of 3.4%, causing more uncertainty around the Fed’s policy moving forward as several Fed governors have become incrementally more hawkish on the timing of rate hikes. We have seemingly moved into the “talking about tapering” phase.
The yield on the U.S. 30-year bond fell 0.32% over the quarter, with overall rates in the long-end rallying from their highs. Reversing the theme in Q1, spread sectors posted positive total returns over the quarter, with the U.S. and the Global Aggregate Indices returning 1.83% and 1.31%, respectively. The rally in rates boosted positive performance, as credit risk premiums declined across most asset classes. Equity markets reported experienced positive performance in the second quarter, with value stocks (MSCI Value Index +4.9%) underperforming growth stocks (MSCI Growth Index +11.2%) after leading the charge in Q1.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2106.pdfMay, 2021
In May 2021, global vaccinations continued, with the total number of inoculations approaching 2 billion. The United States vaccination campaign has been very successful at keeping the virus at bay, allowing states to relax restrictions. Compared to 770,000 jobs being added to payrolls in March, April job growth was subdued (+266,000 jobs). High inflation readings for both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) measures fueled fears that price pressures might be more persistent. The Biden Administration called for investigating the origin of the coronavirus in a Wuhan lab. Israel and Hamas agreed to a ceasefire after weeks of conflict. The European Union considered sanctions on Belarus after the President forced down a commercial airliner to arrest a political opponent.
Despite volatility in equity markets, a downside unemployment miss, and higher than expected inflation data prints, credit performed well with all core income sectors contributing positively to performance. In the U.S., investment-grade corporate credit outperformed high yield as government yields were broadly lower for the month to the benefit of more interest-rate sensitive asset classes. In Emerging Markets, the theme was reversed with high yield outperforming, benefiting from a slower month of net supply. Investment Grade – CaixaBank, Bank of America, easyJet High Yield/Loans – JBS USA, Penske Automotive Securitized – TRINITY (Railcar ABS), ZAXBY (Whole Business ABS), ACRES (CRE CLO)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2105.pdfApril, 2021
In April 2021, global vaccinations continued, with the total number of inoculations surpassing 1 billion. India’s health infrastructure strained under a devastating second wave of Covid-19 infections. Many countries sent much-needed medical supplies including personal protective equipment, therapeutics, and 60 million doses of the AstraZeneca vaccine. The U.S. vaccination campaign has been more successful at keeping the virus at bay, with nearly half of the adult population receiving at least one dose of a vaccine. Despite nearly a million jobs being added to payrolls in March, Fed Chair Powell said the committee had not yet seen “substantial further progress” towards their labour market goals. His response came after the Bank of Canada announced it would begin tapering its asset purchases, causing some Fed-watchers to worry the U.S. central bank would soon follow suit. Given the high bar set by the Federal Open Market Committee, we do not expect tapering to begin until 2022, with rate hikes even further out. The U.S. grew at a 6.4% annualised rate in Q1, ending the quarter less than 1% below pre-Covid levels of output. The Euro Area continued to contract in Q1 due to more severe lockdown measures, but the region is poised for growth in the latter half of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Update-as-of-2104.pdfFebruary, 2021
In February 2021, total vaccinations administered exceeded total confirmed cases of Covid-19 globally, signalling a positive turn in the fight against the pandemic that bodes well for the economic recovery. U.S. retail sales growth for the month of January surprised to the upside, causing many economists to increase their expectations for GDP growth for the year. Stronger expectations for growth and fears of inflation drove government bond yields higher during the month. The state of Texas, one of the largest contributors to U.S. GDP, faced disaster as a winter storm overwhelmed the independent energy grid leaving millions without power or water for days. The January minutes of the Federal Open Market Committee (FOMC) meeting showed that any price increases related to the reopening of the economy will be considered transitory.
Fund review
Risk markets had a strong start in February before volatility picked-up in the second half of the month. The U.S. government yield curve significantly steepened as the reflation trade gained momentum with an improving outlook in growth expectations coupled with prolonged fiscal and monetary stimulus. The Strategy viewed this month’s hiccup as a buying opportunity and added risk modestly through new issue participation in asset-backed and commercial mortgage-backed securities, where valuations are attractive relative to corporate credit, particularly as investment-grade credit spreads richened to their tightest levels since February 2018. We also trimmed our duration in the belly of the curve before the major move in rates. Investment Grade – J.P. Morgan, Macquarie, High Yield – Freeport-McMoRan Securitized – CLIF (Container ABS), COMM (SASB CMBS)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Monthly-Update-as-of-2102.pdfJanuary, 2021
Primary market activity picked up to start off the new year with $131 billion of U.S. Investment Grade issuance coming to market in January. Additionally, Emerging Markets had an all-time record supply month of $127 billion. After a strong start to the year for risk markets, volatility picked up during the second half of January as equity markets sold-off and risk premiums widened in Investment Grade and High Yield corporates, however Investment Grade corporate spreads still closed tighter month over month.
We remain optimistic on the global economic recovery with help from the robust fiscal and monetary support; thus, view further onset volatility as a buying opportunity. The strategy continued to add exposure in Emerging Markets where relative value looks attractive versus corporate credit, and increased exposure modestly in areas of CMBS which are well positioned to recover as economic activity picks up. We maintain our preference for securitised product given the current valuations in corporate credit. Investment Grade – J.P. Morgan, Credit Suisse, 7-Eleven High Yield/Loans – US Foods, Jane Street Securitised – LNCR (CRE CLO), OAKIG (Triple-Net Lease ABS).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Monthly-Update-as-of-2101.pdfDecember, 2020
In December 2020, Covid-19 cases surged past 80 million globally as vaccinations began. Five months after the benefits from the CARES Act lapsed, Congress passed an additional $900 billion Covid-19 relief bill while avoiding a government shutdown. As stay-at-home orders continued in states facing a surge of hospitalisations, the labour market recovery appeared to slow with just 245k jobs added in November. Meanwhile, the service sector continued to expand, with the U.S. service PMI gauge at 55.3, indicating expansion.
In the U.K., at long last, the government brokered a deal to leave the European Union, averting the worst fears about economic disruptions and market impacts. The service sector weakened in the euro area amidst Covid-19 restrictions, with the service sector PMI gauge dropping to 47.3. Still, the manufacturing sector continued to expand with a 55.2 reading in December. Global equity markets ended the year on an upbeat tone, with most broad indices closing at all-time highs.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Monthly-Update-as-of-2012.pdfNovember, 2020
In November, the much-awaited U.S. election concluded with Vice President Joe Biden defeating Donald Trump. Covid-19 cases and hospitalisations surged globally, particularly in the euro area and the U.S. With the return of strict lockdown measures, case counts in the euro area began to decline. Dining reservations and other activity indicators across the region also fell to nearMarch lows, suggesting potential for a “double-dip” in the euro area’s Q4 GDP readings. In the U.S., rising cases and alarming hospitalisation rates did not have the same impact, with U.S. air travel for the Thanksgiving holiday setting a post-pandemic high for the number of travellers. Service sector Purchasing Managers Indices for November showed the same theme. The euro area service sector Purchasing Managers Index fell to 41.7, while the U.S. service sector Purchasing Managers Index improved to 58.4. Equity markets had their best month since April, on the back of stellar news on the clinical trials of the Pfizer, Moderna, and AstraZeneca vaccines and with a near conclusion of the U.S. Presidential transition process.
Investment grade new issuance picked up in November on the heels of the U.S. election and positive Covid-19 vaccine news. Although the election remains contested and COVID cases are surging globally, risk assets rallied over the course of the month with hopes that the end is near, and that the economic recovery can continue in lagging sectors. As we approach year-end, we are optimistic given strong market technicals and recovering fundamentals but remain balanced given the uncertainty of the vaccine roll-out timeline. Our participation in Investment Grade Corporates and High-Yield was more active in November, however we maintain a preference toward Securitised product given fair corporate valuations and further room to recover in areas of Securitised where there was no Fed support to expedite the rebound. In Securitised product, we participated in a new issue Credit Risk Transfer and a Triple-Net Lease Asset Backed Security deal before new issue supply waned into month-end. Investment Grade – Verizon, Allianz, Volkswagen High Yield – Ford, Axalta, Societe Generale Securitised – STACR (Freddit Mac), OAKIG (Triple-Net Lease ABS)
While the virus looms, service providers are adapting as positive news on the vaccines portends a services-led recovery in 2021. Moreover, we are likely to see a strong recovery in GDP and labour market conditions. Monetary policy is expected to be dovish through at least the end of next year and perhaps beyond effectively keeping front-end interest rates low. Furthermore, negative “real” yields will likely continue to fuel risk-asset demand. Although we expect the global economy to recover and the widespread availability of a vaccine to support asset prices, asset valuations are becoming stretched. That said, the strategy remains disciplined, focused on security selection and a welldiversified, balanced portfolio across asset classes.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Payden-Global-Income-Opportunities-Fund-Monthly-Update-as-of-2011-1.pdfticker: GSF0008AU
commentary_block: Array
factsheet_url:
https://www.gsfm.com.au/unlisted-funds/payden-global-income-opportunities-fund/
release_schedule: Monthly
fund_features:
Payden Global Income Opportunities Fund aims to provide a return of 250 basis points after fees above the benchmark, over the medium term; and income (quarterly distributions). The Fund is designed for experienced investors who are looking for a return that seeks to exceed the benchmark through a diversified portfolio of primarily fixed income investment but who can tolerate fluctuations of income and the risk of capital loss.
- Employs the Payden Absolute Return Investing (PARI) strategy.
- Uses derivatives.
- Australian Dollar (AUD) based currency, the Fund will be substantially hedged to AUD unless the Investment Manager expresses a specific market view.
- Minimum 7 years investment time horizon suggested.
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Multi-Strategy Income
peer_benchmark: Fixed Income - Multi-Strat Income Index
broad_market_index: Global Aggregate Hdg Index
structure: Managed Fund