September, 2023
The Fund underperformed the benchmark over the month, amid the ongoing rates volatility and the move wider in credit spreads.
Sector rotation
The Fund maintained its neutral semi-government position in September, with spreads remaining towards the low end of the range versus bond. With the first tranche of the Term Funding Facility now matured in full, the high quality liquid assets demand from bank balance sheets is no longer a certain support for the semi-government sector, with that demand seemingly shifting in favour of Australian government bonds in Q2. The Fund entered a paid 10-year swap exchange for physicals position as swap spreads have tightened materially in September, offsetting the contribution from the short 10-year payer swaption and leaving swap spread exposure marginally short with the outlook for swap flows looking more balanced at the lower end of the range. The Fund’s modest overweight physical credit positioning was a positive contributor to performance as credit markets remained resilient amid a volatile rates backdrop.
Security selection
The Fund remains overweight futures vs physical securities, held in both the short and intermediate sector. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end of the curve, with the longer end now close to flat. This richness continued to normalise in September as the market continues to price the possibility that the Reserve Bank of Australia undertakes active quantitative tightening. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semi-government, exposure is concentrated in the 7 to 10-year part of the curve. We remain underweight Treasury Corporation of Victoria and overweight Queensland Treasury Corporation and New South Wales Treasury Corporation, for relative value considerations.
The Fund’s credit security selection was a positive contributor to performance. Performance from financials was relatively neutral, with major bank senior spreads rangebound over the month and fixed rate bonds retaining their appeal as outright yields remain enticing. Tier 2 was a modest positive despite a fairly volatile month in spread terms, with positioning focused in shorter dated, high carry bonds.
Corporates were broadly steady, with shorter dated auto names outperforming. Structured securities remain a bright spot, spreads rallying further over the month and providing high quality and low beta carry for the Fund over relatively tight corporate spreads. Over the month, the Fund participated in transactions from issuers such as Royal Bank of Canada, WestConnex, Conquest 2023-2 Barton 2023-1 and Driver 8.
Duration and curve
The Fund marginally increased its long duration position in September. The Northern Hemisphere summer continued to weigh on market volumes and bonds were punished as a result. Yields moved steadily higher in the first half of the month before picking up steam into month end as the central bank decisions began streaming in. With most central banks signalling their reluctance to hike further, the continued sell-off in yields likely reflected the market rebuilding term premium given inflation remains above target globally and economic data relatively resilient. The European Central Bank (ECB) delivered a 25bp hike and signalled it was likely their last, with other monetary policy levers, namely quantitative tightening, coming into focus. The US Federal Reserve (Fed) followed with another ‘skip’, however updated the dot plot to indicate another hike this year, whilst also removing rate cut expectations in 2024 and 2025. This message was complicated by Chair Powell’s press conference where he indicated soft landing was not his base case, leaving the market divided as to what this exactly meant. The Bank of England also elected not to hike for the first time in two years, as August CPI printed materially lower than expected, finally conforming to Governor Bailey’s narrative.
The Fund drifted longer duration over the month primarily through the short 10-year payer swaption, as the delta increased as the sell-off moved the market past the strike. Despite the global sell-off being largely fuelled by US centric factors, Australian rates began to underperform in the second half of the month, providing attractive levels to enter a cross market trade of short US 10-year futures versus long AU 3-year futures. Given the cycle is likely near its end, this trade also provides steepening exposure to the Fund. The Fund also added Japanese T-bills opportunistically over the month, as the easing in Australian funding conditions alongside the depreciation of the Japanese Yen provided a decent pickup to Bank Bill Swap Rate. On curve positioning, we remain overweight at the front end, underweight at the belly of the curve and close to neutral from beyond the 10-year point, which generates a small steepening bias as we approach the end of the cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/205294180.pdfAugust, 2023
The Fund outperformed the benchmark over the month, driven by sector rotation, security selection as well as duration and curve.
Sector rotation
The Fund reduced its long semi-government position in August from flat to slightly long, as the spread to bond is at the lower end of the range. We retain a short swap spread exposure, albeit no longer as a hedge to the semi-government exposure, as swap spreads are near post pandemic lows, with this position marginally increasing as the short 2y payer swaption matured out of the money. As the roll off of the first tranche of the Term Funding Facility completes in September, the high quality liquid assets demand from bank balance sheets is no longer a certain support for the semi-government sector.
The Fund’s modest overweight physical credit positioning was a positive contributor to performance as Australian credit spreads marginally tightened in August.
Security selection
The Fund remains overweight futures vs physical securities, held in both the short and intermediate sector. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve, although this did normalise considerably in August as the market moved to price in the change of active quantitative tightening from the Reserve Bank of Australia (RBA). Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semi-government, exposure is concentrated in the 7-10-year part of the curve. We remain underweight Treasury Corporation of Victoria and overweight Queensland Treasury Corporation and New South Wales Treasury Corporation, for relative value considerations.
The Fund’s credit security selection was a positive contributor to performance. Financials continued to be an important driver of performance in August, with significant contribution particularly from some of the European names. The corporate sector also contributed positively to excess return with higher beta industrials and wider-trading names narrowing materially in spread. Structured securities continued their recent robust performance with new deals providing further proof of the strong demand for high quality bank Residential Mortgage-Backed Securities (RMBS) paper. Over the month, the Fund participated in transactions from issuers such as ANZ, CBA, Westpac, NBN Co, LT 2023-1 and IDOLT 2023-1.
Duration and curve
The Fund moved to a long duration position in August, after beginning the month slightly short. August was marked by a dearth of central bank meetings to guide sentiment, with the RBA on hold as expected and the Bank of England hiking 25bps at the start of the month, with the rest of G4 on break for the Northern Hemisphere summer. In lieu of central banks, the market’s focus turned to the fiscal side with yields beginning the month with a sell off as the US Treasury revised their quarterly funding estimate higher to $1tn, triggering Fitch to downgrade the US credit rating and curves to steepen to accommodate higher duration supply. The annual Jackson Hole symposium came and went with little fanfare, with Chair Powell largely sticking to the script, while locally weaker inflation and labour data saw the market resolve that the RBA has likely delivered their last hike. Towards the end of the month, yields began to rally, with some local outperformance, as Chinese economic data continued to deteriorate.
The Fund added duration in the front end of the curve early in the month as the short 2-year payer swaption drifted out of the money, expiring there later in the month. We retained the short September bank bill position as a hedge against the RBA turning more hawkish, but RBA pricing near term finished largely unchanged over the month. We also added a small long duration in the front end of the AU curve as a spread to the back end of the TY curve mid-month, with the AU front end looking cheap given the RBA is likely finished and the back end of the US yield curve facing supply issues. Following the Bank of Japan’s (BOJ) yield curve control tweak at the end of July, we took profit on the short Japan 2-year/1-year overnight index swap as the likelihood of another near term move is small. On curve positioning, we remain overweight the front end, underweight the belly of the curve and long the 10-12-year sector, which generates a small steepening bias as we approach the end of the cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/204158735.pdfJuly, 2023
The Fund outperformed the benchmark over the month, driven by duration and curve as well as sector rotation.
Duration and curve
The Fund moved from slightly long duration to slightly short duration in July. Central banks seemed to shift gear in July, with the Reserve Bank of Australia (RBA) deciding to pause as inflation surprised to the downside, whilst the US Federal Reserve (Fed) and European Central Bank both delivered well-flagged 25bps hikes, but stressed further hikes were not guaranteed. Yields sold off early in the month as the June Federal Open Market Committee minutes tilted hawkish, but this changed tack to see yields finish only marginally higher as inflation data printed to the downside across several economies and soft leading data began to show some weakness. The Bank of Japan relaxed Yield Curve Control towards the end of the month, keeping the 50bps target band but only as a guide, stating yields would be allowed to trade up to 1%. Whilst activity data seems to be somewhat resilient, particularly in the US, it seems most central banks could very well have delivered their last hikes.
Duration moved marginally higher at the start of the month as yields took the swaptions further into the money, then retreated as yields reversed course. Duration primarily moved shorter as we sold September bank bills towards month end as a hedge against the RBA hiking again, before Philip Lowe’s term ends after the September meeting. The rally in the front end of the curve also saw the duration contribution from the 2-year short payer swaption also fall, detracting slightly from duration. As the Term Funding Facility repayments gathered steam, yields in the funding market moved higher as some market participants positioned for potential funding stress. We used this opportunity to take profit on Japanese T-bills and rotate back into bank bills as the basis narrowed. The yield curve steepened materially into month end as major central banks delivered potential last hikes, consistent with end of cycle price action. We were positioned well for this, being overweight the front end, whilst underweight the belly and relatively neutral further out the curve.
Sector rotation
The Fund continued to reduce its long semi government exposure passively through the month end index extension. We continue to hold the semi government exposure against swap to hedge against the risk of a sustained widening given the relentless issuance profile. However, it appears the collective issuance profile is largely in the price, with semi to bond and semi to swap spreads both spiking wider in the month before falling back to finish largely unchanged. Although with the roll off of the Term Funding Facility in full swing, further bank high quality liquid assets demand is uncertain. The Fund’s swap spread exposure moved shorter over the month, which was primarily function of the short September bank bills, with a small contribution from the 2-year payer swaption moving out of the money. The Fund’s modest overweight to physical credit was a positive contributor to performance as Australian credit spreads rallied towards their 2023 tights.
Security selection
The Fund remains overweight futures vs physical securities, held in both the short and intermediate sector. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semi-government, exposure is concentrated in the 7-10-year part of the curve. We remain underweight Treasury Corporation of Victoria and overweight Queensland Treasury Corporation and New South Wales Treasury Corporation, for relative value considerations.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/203623502.pdfJune, 2023
The Fund underperformed the benchmark over the month, amid the ongoing rates volatility and the move wider in credit spreads.
Sector rotation
The Fund largely maintained its long semi government exposure, hedged with swap, drifting marginally shorter at month end with the index extension. Semi-governments tightened to bond over the month but widened versus swap due to a relentless tightening in swap spreads, seeing them detract from performance. Despite the tailwind to the sector from Bank high quality liquid assets demand being well past its peak as the Term Funding Facility maturities ramp up, the continued reduction in AOFM issuance should see the semi-government sector retain some high-quality liquid assets bid. The Fund’s short swap spread exposure was reduced over the month as a function of the short payer swaptions, with the duration contribution of the positions increasing as yields rise. The Fund’s modest overweight physical credit positioning was a positive contributor to performance as Australian credit spreads continued to grind tighter.
Security selection
The Fund remains overweight futures vs physical securities, held in both the short and intermediate sector. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semi-government, exposure is concentrated in the 7-10-year part of the curve. We remain underweight Treasury Corporation of Victoria and overweight Queensland Treasury Corporation and New South Wales Treasury Corporation, for relative value considerations.
The Fund’s credit security selection was a broadly neutral contributor to performance. Senior financial paper moved a touch tighter, though Tier 2 spreads were the outperformer following Westpac’s long-awaited transaction and were a solid returner. Corporate performance was more muted with recent utility deals outperforming alongside defensive infrastructure names. Securitised credit had a busy month which saw the highest volume in primary issuances so far in 2023. Spreads moved 10bps tighter in senior-AAA deals and were a strong performer for the Fund. Protective credit default swap positions were a modest detractor as spreads rallied into the half-year close. Over the month, the Fund participated in transactions from issuers such as Harvey 2023-1, Lion 2023-1, Westpac Banking Corporation, QBE Insurance Group, AGI Finance and Transpower New Zealand.
Duration and curve
The Fund moved from short duration to slightly long in June, with duration increasing naturally over the month as the sell off increased the delta on the swaptions. The Reserve Bank of Australia (RBA) hiked 25bps in June, which the market took as hawkish, and saw Australian yields underperform peers early in the month as the rates sell off gathered steam. A string of upside surprises in economic data saw the market abandon the impending recession narrative, particularly as US core CPI and UK CPI showed persistence. The US Federal Reserve (Fed) opted for a hawkish pause in June, but flagged two more hikes were likely this year via the updated dot plot, whilst the Bank of England (BoE) surprised the market with a 50bps hike as they struggle to contain inflation. Yields began trading sideways towards the latter half of the month and Australia began to outperform as the RBA’s June minutes proved the June hike was in fact dovish, with the decision between a pause and a hike finely balanced. Yields moved higher into month end, although heading in the US summer this was likely a position covering move rather than a rapid shift in sentiment.
As yields sold off, duration naturally moved longer as we approached the strikes on the 2-year and 10-year swaptions. Prior to the RBA, we took profit on a short June bank bill position, which had contributed positively to performance as a hedge against the RBA moving more hawkish. The yield curve flattened aggressively throughout the month, providing attractive levels to begin entering a steepening position as the RBA is very likely close to the end of their hiking cycle. The sell off in yields saw the market begin testing the Bank of Japan on their resolve to keep the Japanese Yen from depreciating significantly, which provided an opportunity to deploy excess cash in Japanese T-bills for a pickup over Bank Bill Swap Rate. Across the curve, we are overweight the front end as a reflection of central banks nearing the end of their hiking cycles, underweight the belly and relatively neutral further out the curve.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/202350204.pdfMay, 2023
The Fund outperformed the benchmark over the month, driven by sector rotation, as well as security selection.
Sector rotation
The Fund maintained its long semi government exposure, held against swaps. While semi-governments continue to look attractive on an outright yield basis, the potential for the US banking crisis to re-emerge puts spread products at risk to sentiment shifts, particularly as the US liquidity drain commences. Semi-governments widened slightly over the month, both to swaps and bonds, as several issuers delivered their Budget updates. Bank high quality liquid assets demand is likely to continue to support the sector over the coming months, although this effect will begin to wane. The short swap spread exposure was marginally reduced via the addition of 10-year swaptions.
The Fund’s modest overweight physical credit positioning was a positive contributor to performance as Australian credit spreads moved tighter over the month.
Security selection
The Fund remains overweight futures vs physical securities, held in both the short and intermediate sector. Physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semi-government, exposure is concentrated in the 7-10-year part of the curve. We remain overweight Queensland Treasury Corporation and New South Wales Treasury Corporation and underweight Treasury Corporation of Victoria, with the latter materially underperforming post their Budget update.
The Fund’s credit security selection was a neutral contributor to performance. Bank senior paper outperformed, and while Tier 2 spreads moved modestly wider the excess carry more than offset. High quality covered bonds and Kangaroo names also contributed to performance. In corporates, the utilities space provided solid performance as several primary deals set firm spread levels and led to a broad-based sector rally. The Fund’s overweight to NBN continues to perform strongly, with the ratings upgrade by Moody’s to Aa3 catalysing another rally in spreads. Structured securities again contributed to Fund returns, but were offset by a rally in Supranational, Sovereign and Agency bonds where the Fund is underweight. Over the month, the Fund participated in transactions from issuers such Ausnet, National Australia Bank and Suncorp.
Duration and curve
The Fund moved from neutral to short duration in May, trading duration tactically over the month. The Reserve Bank of Australia (RBA) hiked 25bps in May, a mere month after pausing to reassess the data. Governor Lowe cited persistent services inflation and stronger labour data as catalysts for the hike in order to achieve inflation within the target band by 2025. This hawkish shift surprised the market, triggering a sell off which was exacerbated as the US debt ceiling debate generated uncertainty and reduced market participation. The Reserve Bank of New Zealand also surprised the market, but in the opposite direction, delivering a 25bps hike and signalling it is likely the last. The US Federal Reserve (Fed), European Central Bank and Bank of England all hiked 25bps, but these were second order events to the US debt ceiling, which saw yields volatile and at the mercy of rapidly shifting sentiment.
Duration was initially added via swaptions as the Fund sold payers in the 10-year sector, allowing duration to extend in the event yields continue to sell off. We then initiated a paid 2-year/1-year position in Japanese overnight index swaps to provide upside exposure to any Bank of Japan-induced global duration sell off in the event of a change to Yield Curve Control, with limited downside risk, taking us short.
The Fund maintained a small short in the very front end of the curve, which has contributed positively to performance as the RBA tilted hawkish in May. We remain overweight the 10-year part of the curve and underweight the belly.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/200886036.pdfApril, 2023
The Fund outperformed the benchmark over the month, driven by sector rotation as well as security selection.
Sector rotation
The Fund maintained its long semi-government exposure, albeit on a hedged basis versus swap. While semi-governments still look attractive on an outright yield basis, the potential for the US regional banking crisis further permeating global markets puts spread product at risk. Thus, the risk-reward for holding the position outright is not attractive. Semi-governments performed well over the month, tightening significantly to Australian Commonwealth Government Bonds (ACGBs) whilst trading largely sideways to swap, which contributed positively to performance. Outside of the financial contagion narrative, the bank high quality liquid assets demand narrative will continue to support the sector, although this effect will begin to wane, so we remain comfortable with the hedged exposure.
The Fund’s modest overweight position to physical credit was a positive contributor to performance, as Australian credit spreads moved tighter over the month.
Security selection
The Fund is overweight derivatives vs physical securities both in swap and futures, held in the short and intermediate sector. Physical ACGBs remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs overnight index swap and futures. Within semigovernment, exposure was partially shifted into the belly as the spread curve flattened materially. We remain underweight Treasury Corporation of Victoria and overweight Queensland Treasury Corporation and New South Wales Treasury Corporation, with exposure to the latter increasing over the month on a tactical relative value basis, as opposed to an improved issuer outlook.
February, 2023
The Fund outperformed the benchmark over the month, driven by sector rotation, duration and curve as well as security selection.
Sector rotation
The Fund marginally increased its semi-government exposure over the month, which contributed positively to performance. Semigovernments tightened versus both swap and bond over the month as there continues to be strong demand from both bank balance sheets and the official sector. Whilst the state governments have large issuance tasks, we continue to believe the semi-government sector offers value given this issuance task is well telegraphed, most issuers are well progressed through the issuance and bank balance sheets should have high quality liquid assets requirements in 2023 given the expiry of Term Funding Facility and Committed Liquidity Facility. The Fund’s overweight credit positioning contributed positively to performance as Australian credit spreads outperformed global peers.
Duration and curve
The Fund’s duration positioning moved from neutral to long in February as a decisively hawkish pivot from the Reserve Bank of Australia (RBA) saw yields sell off significantly as terminal rate pricing reached an intra-month high of 4.40%. Globally, the trend of disinflation appears to have stalled, with upside surprises in US and EU consumer price index (CPI) seeing central bank policy paths reprice higher, and forecasted rate cuts pushed further out the curve. Locally, a stronger-than-expected Q4 CPI was the initial catalyst for the RBA’s hawkish shift, leading them to consider a 50bps hike in February, however the outlook was muddied as employment data printed negative for the second consecutive month and Q4 Wage Price Index missed expectations. This saw Australian duration outperform globally.
We took profit on a short US front end position as stronger than expected US inflation saw the US front end repriced higher as the market began to accept the Federal Reserve is likely to pause after they finish hiking, pushing rate cuts further out the curve. We unwound this US exposure on a spread to AU 10-year as the AU yield curve bear flattened as rates moved higher. Over the month, duration was added in the AU front end primarily via futures, though we also took advantage of elevated volatility and initiated a swaption position that will take the Fund longer on a sustained sell off. Whilst we have reduced some flattening exposure, we continue to concentrate duration in the 10- year part of the curve given the relative steepness of the AU curve versus developed market peers.
Security selection
The Fund is overweight derivatives vs physical securities both in swap and futures, held primarily in the 10-year part of the curve albeit with an increased exposure in the 3-year part of the curve over the month. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap (OIS) curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value vs OIS and futures. Within semi-government, we marginally added exposure to South Australian Government Financing Authority as they came to market with a new 4.75% May 2038. We also increased exposure to Queensland Treasury Corporation (QTC) as they continue to have the strongest issuance profile, while we reduced exposure to Treasury Corporation of Victoria given their uncertain funding outlook and material tightening to the QTC curve. We remain neutral to slightly overweight to New South Wales Treasury Corporation as their mid-year funding outlook was slightly worse than expected, whilst the upcoming NSW State election adds further uncertainty.
The Fund’s credit security selection added to performance. Excess returns were driven by BBB credits and higher beta corporates, with further credit curve flattening as the market digests a lack of issuance and higher all-in yields. Senior financials moved tighter despite heavy supply, with Tier 2 bonds also benefitting performance with primary not able to satisfy investor demand particularly in fixed rate tranches. Structured securities were a strong contributor, with spread tightening of over 20bps over the month and very strong demand from investors. Higher than benchmark carry also benefitted the Fund. Over the month the Fund participated in transactions from issuers such as HSBC, Svenska Handelsbanken, Westpac Banking Corporation, FPTT 2023-1 and TRTN 2023-1.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/197655906.pdfDecember, 2022
The Fund outperformed the benchmark over the month, driven by security selection, duration and curve as well as sector rotation.
Security selection The Fund is overweight derivatives versus physical securities both in swap and futures, held in the 10 year part of the curve. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value versus overnight index swap and futures. Within semi-government, we reduced our underweight to Treasury Corporation of Victoria given considerable progression in their funding task, and spreads have widened to accommodate their irregular issuance pattern. We prefer to be overweight Queensland Treasury Corporation given conservative coal price assumptions provide a tailwind to revenues, with a lower AUD also working in their favour. We are also overweight NSW Treasury Corporation given funding task is largely priced into spreads and prefer to be underweight Western Australia Treasury Corporation given deteriorating outlook for iron ore, with conservative price forecasts for the commodity already reflected in spreads. In addition, we have deployed some excess cash backing derivatives into JPY bills fully hedged back to AUD for a favourable yield pick up to Bank Bill Swap Rate (BBSW).
The Fund’s credit security selection added to the outperformance. Despite the recent major bank senior note issuance, robust demand saw the major bank senior spreads tightened and curve bull-flattened. With the recent purchases of major bank subordinated debt notes at historically wide spreads, the return of demand in the sector this month following the widening seen towards the end of last month and the Australian Prudential Regulation Authority’s letter on “Expectations of capital calls” contributed positively to performance over the month. Structured securities continued to contribute to the outperformance with the carry benefiting the Fund as spreads remained broadly unchanged. Over the month the Fund participated in transactions from issuers such as Westpac Banking Corporation, National Australia Bank, ING Bank, Firstmac Asset Funding Trust No. 1 Series Auto No. 1, Think Tank Commercial Series 2022-3 Trust and IDOL RMBS Series 2015-1 Class A note refinance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/194875725.pdfNovember, 2022
The Fund outperformed the benchmark over the month, driven by security selection, duration and curve as well as sector rotation.
The Fund is overweight derivatives versus physical securities both in swap and futures, held in the 10 year part of the curve. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the curve. Within ACGBs, we continue to hold our exposure in the back end of the curve where bonds offer more value versus overnight index swap and futures. Within semi-government, we reduced our underweight to Treasury Corporation of Victoria given considerable progression in their funding task, and spreads have widened to accommodate their irregular issuance pattern. We prefer to be overweight Queensland Treasury Corporation given conservative coal price assumptions provide a tailwind to revenues, with a lower AUD also working in their favour. We are also overweight NSW Treasury Corporation given funding task is largely priced into spreads and prefer to be underweight Western Australia Treasury Corporation given deteriorating outlook for iron ore, with conservative price forecasts for the commodity already reflected in spreads. In addition, we have deployed some excess cash backing derivatives into JPY bills fully hedged back to AUD for a favourable yield pick up to Bank Bill Swap Rate (BBSW).
The Fund’s credit security selection added to the outperformance. Despite the recent major bank senior note issuance, robust demand saw the major bank senior spreads tightened and curve bull-flattened. With the recent purchases of major bank subordinated debt notes at historically wide spreads, the return of demand in the sector this month following the widening seen towards the end of last month and the Australian Prudential Regulation Authority’s letter on “Expectations of capital calls” contributed positively to performance over the month. Structured securities continued to contribute to the outperformance with the carry benefiting the Fund as spreads remained broadly unchanged. Over the month the Fund participated in transactions from issuers such as Westpac Banking Corporation, National Australia Bank, ING Bank, Firstmac Asset Funding Trust No. 1 Series Auto No. 1, Think Tank Commercial Series 2022-3 Trust and IDOL RMBS Series 2015-1 Class A note refinance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/193268233.pdfOctober, 2022
The Fund underperformed the benchmark over the month, as a result of the ongoing rates volatility and the move wider in credit spreads.
Security selection The Fund is overweight derivatives versus physical securities both in swap and futures, held in the 10 year part of the yield curve. The physical Australian Commonwealth Government Bonds (ACGBs) remain ‘rich’ to the overnight index swap curve, particularly in the front end and belly of the yield curve. Within ACGBs, we continue to hold our exposure in the back end of the yield curve where bonds offer more value versus overnight index swap and futures. Within semi-government, we remain short Treasury Corporation of Victoria given their poor issuance pattern, with a new 2036 bond issued this month. We prefer to be overweight Queensland Treasury Corporation given conservative coal price assumptions provide a tailwind to revenues, with a lower AUD also working in their favour. We are also overweight New South Wales Treasury Corporation given funding task is largely priced into spreads, and prefer to be underweight Western Australia Treasury Corporation given deteriorating outlook for iron ore, with conservative price forecasts for the commodity already reflected in spreads.
The Fund’s credit security selection performed in line with the benchmark over the month. The overweight to the front-end part of the curve detracted as credit spreads bear-flattened, though higher than benchmark carry helped offset. The Fund participated in transactions from issuers such as Australia and New Zealand Banking Group, Commonwealth Bank of Australia and Firstmac 2022-4.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/192276216.pdfSeptember, 2022
The Fund outperformed the benchmark over the month, driven by duration and curve positioning.
Duration and curve
The Funds’s positioning is modestly long duration, after we shifted from neutral duration last month. Bonds continue to sell-off on inflationary fears and central bank hawkishness, with US 10 year breaking above 4% this month as a sell off initiated by strong US Consumer Price Index was exacerbated amid a Gilt-led sell-off following the announcement of UK Government’s unfunded tax cuts. Our view is that central banks will overtighten policy and cause a prolonged period of low growth which will make it hard to sustain any further rise in yields. The long position is predominately held in the 10 year part of the yield curve as we think curve flattens further as central banks hike through neutral.
We reduced our overweight to AU versus US in the front end of the curve this month as the US Federal Reserve’s terminal pricing moved above the Reserve Bank of Australia (RBA) pricing. We continue to hold a small position as RBA hikes will have a sharper impact on household spending given we have a higher proportion of variable mortgages, and higher household indebtedness, than other countries.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/191324872.pdfJuly, 2022
Bond yield movements in Australia were broadly in line with the global moves, as there was a mild sell-off mid-month but it was overwhelmed by a strong late rally. Inflation has remained strong but came in below market expectations, with Q2 consumer price index coming in at 1.8% and the labour market remains tight, though it is expected to loosen as the Australian federal government announced a significant ramp-up in immigration and will ease migration caps to bring in more foreign workers. Consumer sentiment has continued todeteriorate and business confidence has been soft, as retail sales has continued to weaken, causing volatility in yields as incoming data.
was digested. The Reserve Bank of Australia delivered another 50-basis point hike in the July meeting, taking the overnight cash rate to 1.35% as the Bank continues to front-load the tightening cycle. The Australian 10 year bond futures implied yield traded between 3.06% and 3.72% in July (a range of 66 basis points versus 95 basis points in June), with the 10 year yield ended the month at 3.07%, 61 basis points lower on the month. The Australian 3 year bond futures implied yield traded between 2.74% and 3.39% in July (a range of 66 basis points versus 111 basis points in June), with the 3 year yield ending the month at 2.78%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189606048.pdfJune, 2022
The Fund underperformed the benchmark in June as a result of the ongoing rates volatility and the move wider in credit spreads. Duration and curve
The Fund holds a modest long bias to duration which was a detractor from performance this month. Early in June bonds continued to sell off on the momentum of the recent move with global central banks continuing to aggressively raise rates. However, bonds rallied back into month-end with Australian rates outperforming after the Reserve Bank of Australia (RBA) Governor Lowe pushed back on market pricing and said current conditions only call for a 25 basis point or 50 basis point hike, which saw a moderation of the effect on performance. We believe the RBA faces a lower terminal rate than other developed markets as there is a significant difference in the inflation outlook domestically versus overseas. RBA hikes will have a sharper impact on household spending given we have a higher proportion of variable mortgages, and have higher household indebtedness, than other countries. Markets continue to price in higher expectations for RBA hikes than the US Federal Reserve (Fed), which we think is unlikely to be realised in practice. As such, we have maintained our overweight to AU duration versus US in the front-end of the yield curve. Sector rotation
The Fund changed its sector positioning over the month as we initiated a modest overweight to the semi-government sector taking advantage of the better levels available. Semi-government spreads have widened materially given the sharp move in swap spreads which has left semi-governments at multi-year wides to Australian Commonwealth Government Bonds. The State Governments have had notable funding tasks, with significant supply still to come and the FY23 funding programs totalling $A75bn, with New South Wales Treasury Corporation and Treasury Corporation of Victoria making up the lion’s share of supply. However, the outlook is more balanced going forward and are cognisant that balance sheets have large high quality liquid assets requirements and will take down a significant proportion of this. If levels remain attractive, we will look for opportunities in the primary market to increase our exposure to this sector going forward. The Fund’s credit positioning was a detractor to performance in June as credit spreads widened further. Even though major bank senior curve remained relatively anchored as offshore demand continued to be supportive, the higher-beta subordinated bonds moved wider given concerns around supply and generally weaker backdrop. Remarking of spreads in structured securities, particularly residential mortgagebacked securities, detracted from performance. The underperformance in credit was broadly based, though higher than benchmark carry as well as protective credit default swap positions continued to provide a positive offset to the spread widening.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/188916326.pdfMay, 2022
The Fund underperformed the benchmark during the month amid the broad-based volatility driven by ongoing concerns around central bank tightening and rising inflation, which continues to impact fixed income markets. Duration and curve.
The Fund changed its positioning in May as early on we shifted from close to flat duration to reinitiate our long duration position. We continue to expect that the Reserve Bank of Australia (RBA) will not be able to achieve the rate hiking cycle which is priced in. Also we had gotten back to neutral expecting that bonds could continue to sell off on momentum of the move with global central banks aggressively raising rates. Our view played out in the latter half of April as bonds sold-off and so we were able to re-instigate the long position at more attractive levels. This trade benefited performance as yields trended lower for most of the month.
We still believe the RBA faces a lower terminal rate than other developed markets such that the amount priced into the front-end of the AU curve is attractive given it is unlikely to be realised in practice. There is a significant difference in the inflation outlook domestically versus overseas (e.g. headline inflation in Australia is 5.1% YoY, compared to 8.5% YoY in the US). RBA hikes will have a sharper impact on household spending given high household leverage domestically, with much of the Australian market also having short-term fixed rate mortgages which will start to roll off. We still have an AU-US position in the front-end of the yield curve which detracted during the month as Australian bonds continued to underperform. We still believe that the RBA will be forced to hike slower than the Fed, but flow is currently outweighing fundamentals for the time-being.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187690272.pdfApril, 2022
The Fund underperformed the benchmark during the month amid the continued broad-based volatility in markets driven by central bank tightening and concerns around rising inflation. Duration and curve The Fund began the month long duration but we pared this back closer to neutral early in April by paying front-end swap. This helped protect the Fund against further losses as yields continued to rise and swap spreads widen into month-end.
The US Federal Reserve’s (Fed) hawkish tone, together with the 50bp hikes from the Bank of Canada and Royal Bank of New Zealand and the stronger National Australia Bank Business Survey data, led to a reassessment of how quickly the Reserve Bank of Australia (RBA) will be able to hike in a world where global central banks are raising rates aggressively.
We still believe the RBA faces a lower terminal rate than other developed markets such that the amount priced into the front-end of the AU curve is attractive given it is unlikely to be realised in practice. There is a significant difference in the inflation outlook domestically versus overseas (e.g. headline inflation in Australia is 5.1% YoY, compared to 8.5% YoY in the US). RBA hikes will have a sharper impact on household spending given high household leverage domestically, with much of the Australian market also having short-term fixed rate mortgages which will start to roll off. We think current levels in the front end of the Australian yield curve are very attractive, but we believe that it makes more sense to wait until the RBA start hiking and liquidity is better before re-entering a long duration position. We still have an AU-US position in the front-end of the curve given our view that the RBA will be forced to hike slower than the Fed.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187152558.pdfFebruary, 2022
The Fund outperformed the benchmark during the month, driven by its duration and curve positioning as well as security selection.
The Fund’s duration positioning has been actively traded around the market volatility this month. The Fund is currently positioned long duration overall, with an overweight bias in the front-end of the curve. We took profit on our Australia-US yield spread position in the frontend of the curve early in the month, as pricing in the US front-end had moved materially higher in recent months to be consistent with what was already priced in the Australian front-end. We continue to hold the Australia-US spread in the 10 year maturity, as we believe the Reserve Bank of Australia (RBA) will be slower to hike rates than the US Federal Reserve (Fed). This is because Australian households have a higher sensitivity to interest rate rises, given high household leverage as well as the construct of the Australian mortgage market being predominantly short-term fixed rate debt. The spread widened in February as the Australian rates market lagged behind on the safehaven bid for US Treasuries as a result of Russia’s invasion of Ukraine.
Our recent Fixed Income Strategic Forum noted that while aggregate demand had rebounded, it was settling into the pre-pandemic trend that underpinned the lower-for-longer environment for policy and rates. Analysis shows that current elevated inflation is therefore largely a result of aggregate supply remaining compromised by the effects of the pandemic. If indeed the pandemic begins to fade as a dominant influence, the supply side of the global economy is expected to gradually repair, and with base effects kicking in, the path for inflation was forecast to trend lower during the second quarter and accelerate through the second half of 2022. Oil was a big risk to that view. And not only have the events in Ukraine pushed energy/commodity prices higher, but the resulting sanctions are also providing more difficulties for the supply side of the economy. We therefore modify our assessment and see risk in the short term for inflation to remain more elevated. However, we feel that the downside risks for growth have also increased in the medium term. We came into 2022 expecting periodic volatility and a tricky investment path to navigate. Indeed, the price action in recent months is actually creating value opportunities. During 2021, our investment approach was cautious, holding low levels of duration and low levels of exposure to risk assets. This positioning provides our portfolios the opportunity to take advantage of expected volatility and a cheapening of valuation and add duration and risk, from both our top-down and bottom-up processes.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/185019029-1.pdfJanuary, 2022
The Fund outperformed the benchmark during the month, driven by security selection as well as duration and curve positioning.
The Fund’s security selection has been overweight to the ultra-long maturity Australian Commonwealth Government Bonds (ACGBs) given their steepness relative to global curves, and as this position continues to perform, we have reduced the size of the overweight to take profit. The tapering of quantitative easing (QE) should drive the outperformance of ultra-long ACGBs given the RBA has only purchased sub-12 year maturities, and we will see the relative scarcity of those shorter maturities reverse as QE ends. Within semi-government holdings, we have trimmed some of the shorter-dated exposures where they are still trading at materially negative asset swap spread levels, and added in the 10 year maturities where curves were already steep as markets anticipate more supply. The Fund has remained overweight swap spread exposure as a partial hedge against the semi-government underweight.
We expect that derivatives should outperform physical securities as the RBA continues to taper their asset purchasing program. The Fund’s credit security selection slightly underperformed the benchmark over the month. While the new senior financial deals issued during the month generally outperformed, longer-dated corporate bonds as well as higher-beta bonds, such as financial subordinated bonds, underperformed as volatility in risk markets picked up. Over the month, the Fund participated in primary transactions from issuers such as Commonwealth Bank of Australia, Westpac, Suncorp, Sumitomo Mitsui Banking Corporation, European Investment Bank and Asian Development Bank.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/183937328.pdfDecember, 2021
The Fund outperformed the benchmark during the month, driven by security selection as well as duration and curve positioning.
Within security selection, the Fund has been overweight to the ultra-long Australian Commonwealth Government Bonds (ACGBs) given the steepness relative to global curves, but has reduced this position slightly in size given it has performed well in recent months, with micro steepening trades expressed from the 20 year area towards 15 year bonds. The tapering of quantitative easing (QE) should drive the outperformance of ultra-long bonds given the Reserve Bank of Australia (RBA) has only purchased sub-12 year tenors, and we will see the relative scarcity of those shorter tenors reverse as QE ends. Further micro steepening trades were expressed in the 10 year bonds where we bought the 2030 maturity ACGB given its cheapness on leaving the futures basket against longer tenor bonds. In semi-government bonds, we rotated out of mid curve Western Australia bonds that were trading relatively expensive in favour of Queensland, which we view as relatively cheap.
We are slightly overweight swap spread exposure given the value on offer against ACGBs and semis. We expect that derivatives should outperform physical securities as the RBA continues to taper their asset purchasing program. Consistent with this, we sold our holdings of the 3 year bonds into futures given the arbitrage opportunity on offer. The Fund’s credit security selection contributed positively to performance over the month. With the dramatic rally in Tier 2 spreads in December, financial and corporate subordinated debt were a key contributor to the outperformance. The Fund remains defensively positioned with credit default swap (CDS) offsets, and during the month added some protective investment grade CDX positions to further hedge credit risk. Over the month, the Fund participated in a primary transaction from Centuria Industrial REIT.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/182469452.pdfNovember, 2021
The Fund outperformed the benchmark during the month, driven by its duration and curve positioning as well as security selection.
The Fund’s security selection is overweight to the ultra-long Australian Commonwealth Government Bonds (ACGBs) given the steepness relative to global curves, but we have reduced this overweight slightly in size given it has performed well in recent months. The tapering of quantitative easing (QE) should drive the outperformance of the ultras long maturities given the RBA has only purchased sub-12 year tenors and we will see the relative scarcity of those shorter tenors reverse as QE ends. We have taken advantage of relative value opportunities in the ACGBs and have been moving into the front of the 10 year basket given how flat the basket is. We are slightly overweight the swap spread exposure given its value on offer versus bonds, and believe that derivatives should outperform physical securities as the RBA continues to taper their asset purchasing program. The Fund’s credit security selection contributed positively to performance over the month. Even though spreads of subordinated financial paper widened in sympathy with senior paper, a number of the higher-beta corporate bonds, such as Qantas, Pacific National and Brisbane Airport, tightened throughout the month as the economy reopened and recovered further. Given the lack of liquidity heading into the new year, with a slightly weaker technical backdrop as global central banks have turned more hawkish, and the new Omicron variant starting to spread around the world, the Fund added more credit default swap protection positions to allow selective participation in primary transactions that offer value without adding to credit duration risk. Over the month, the Fund participated in primary transactions from issuers such as Mercury NZ, Australia Pacific Airports Melbourne, Computershare US and Bank of Queensland.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/181821494.pdfOctober, 2021
The market repricing of short-term rate expectations and the change in tone by several central banks have unsettled the rate markets but, to date, these are being largely ignored by risk markets. Our sense is that the reaction across markets are not consistent, but the key test may not come until 2022 on whether central banks follow the markets lead and actually deliver tighter monetary policy. Meanwhile, the macro fundamentals continue to fuel the debate over whether current inflation will prove transitory or structural. Commodity prices, particularly oil and gas, are re-fuelling the upside risk for inflation. Labour shortages and wage pressures are keeping central banks restless. However, growth during the third quarter was soft and in many cases the start of the fourth quarter remains soft. This mix of data has the stagflation debate raging across media, economists and market participants.
The core of the debate is around whether current inflation is being driven by supply chain problems or rising demand. In addition, the word ‘transitory’ was used to describe the inflation surge in 2021 without any clear definition of what transitory means. We sit firmly in the camp that the world continues to be driven by a unique event as a result of the pandemic and while this persists, so will the supply chain problems. Demand surge is largely the result of a redistribution of spending from services to goods, which was supported by unprecedented government transfers/support to displaced workers. The world is working together to move on from the pandemic and when this happens the supply chain problems too should be released, the problem is that we do not know when that will happen.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/181058202.pdfSeptember, 2021
The Fund outperformed the benchmark this month, with all three alpha sources contributing to performance. Duration and curve The Fund’s duration positioning is optically neutral though still short US verses Australia. Yields rose this month, reversing most of the rally from earlier in the quarter, so we took off the duration short following the move by adding in the front-end of the swap curve. The carry and roll are attractive particularly in comparison to the benchmark Australian Commonwealth Government Bond (ACGB) in the same part of the curve, and this exposure should trade lower beta to the rest of the curve. We remain short US verses Australian duration given our view that the RBA lags its counterparts in withdrawing policy accommodation, and the terminal rate here is likely to be lower given high household debt and the proportion of it, which is held in floating-rate mortgages which makes serviceability a risk. Sector rotation
The Fund’s sector positioning has evolved this month as we have added semi-government sector exposure. We saw a swathe of state government issuance, and in new primary deals we added semi-government exposure to the Fund at attractive levels. The deals were sizable which should mean a small breather from issuance, and the end of the Committed Liquidity Facility (CLF) should provide a tailwind for semi-government bonds. It is noted that the implementation of the Prudential Standard APS 117 changes relating to interest rate risk in balance sheets have been pushed out to 2024, and that means that balance sheets of Authorised Deposit-taking Institutions may be less incentivised to shift into longer-dated semi-government tenors. Semi curves can remain steeper as the state governments continue to term out their issuance to take advantage of lower outright yields. The Fund’s credit positioning contributed positively to the outperformance relative to the benchmark in September despite the underperformance in Australian credit. The outperformance in the belly of the credit curve also helped drive the outperformance over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/179655952-1.pdfJuly, 2021
The Fund slightly outperformed the benchmark this month on a pre-fee basis, driven by sector rotation and security selection. Sector rotation Within sector positioning, the Fund has held an underweight to the semi-government sector, though this position was reduced in size over the month. There have been a number of primary deals launched this month with attractive new issue concession and this, when combined with the widening of spreads, has meant that we have been set at attractive levels. Semi-government spreads were previously tight and we had viewed the yield pick-up in certain parts of the curve as insufficient, but spreads have drifted wider following the announcements of the state government’s bigger-than-expected funding tasks and the Reserve Bank of Australia’s (RBA) reduction in weekly semi-government purchases. The Fund’s credit positioning contributed positively to its performance relative to the benchmark in July despite the Australian credit market moved broadly sideways. The Fund benefitted from the bull-steepening of the credit curve as the overweight credit positioning was tilted towards the front to mid part of the curve, despite the slight underperformance of some of the COVID-impacted sectors. The Fund’s credit positioning also continued to benefit from higher carry than the benchmark. Given credit spreads continuing to hover around historically tight levels and with major banks likely to start issuing senior unsecured bonds in the foreseeable future, the Fund took the opportunity in this relatively low-volatility environment to establish a small amount of credit default swap protection position, which allows the Fund to continue to participate in issues at higher spreads. Security selection
Within security selection, the Fund has been positioned overweight to the belly versus the wings in the Australian Commonwealth Government Bond portion of the Fund and bar-belled in the semi-government portion. The RBA’s Yield Curve Control policy and bond purchasing program have anchored yields at the front end of the curve, before sharply steepening to reflect a rate hiking cycle, which we believe is unlikely to be realised in practice, and we have been overweight to the ultra-long bonds given the steepness relative to global curves and attractiveness to foreign investors on a hedged yield basis. We have had a preference for the 10-12 year semi-government maturities, as spread curves have remained steep due to a supply-demand mismatch for different tenors, with regulatory demand focused on shorter maturities while issuers have preferred to term out their debt.
The Fund’s credit security selection marginally outperformed the benchmark despite slight widening in some of the high-beta industrial names such as Qantas, Brisbane Airport and Pacific National. Further compression of spreads in financial subordinated bonds was one of the main contributors to the Fund’s performance in July. Over the month, the Fund participated in primary transactions from issuers such as CNH Industrial Capital, Banco Santander, Dexus Wholesale Property Fund, Triton 2021-2, Puma 2021-2 and Metro 2021-1.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/175649594.pdfJune, 2021
The Fund outperformed the benchmark this month, driven by sector rotation as well as duration and curve positioning. Sector rotation
The Fund’s sector positioning is underweight semi-government bonds given that semi-government spreads are tight and we view the yield pick-up in certain parts of the curve as insufficient to compensate for the liquidity forgone. Semi-government spreads drifted a little wider in June following the state government budget announcements, where they signalled bigger funding tasks than expected. The state government budgets have improved their budget bottom line as Australia has recovered quickly from the impacts of COVID-19, but they are spending all the improvements, and hence the short has added value. The NSW Treasury Corporation in particular is looking to borrow $35.5bn next year, with some of the borrowings to be invested in the NSW Generations Fund. In addition, the Reserve Bank of Australia’s (RBA) weekly semi-government purchases have been supportive for spreads and allowed supply to be absorbed by markets with relative ease. However, the RBA is to make a decision on whether to extend quantitative easing (QE) and the yield curve control (YCC) policy at the July meeting, and spreads should go a lot wider when QE eventually rolls off as the RBA has been the key buyer at current levels.
The Fund’s credit positioning contributed positively to its outperformance relative to the benchmark. The Australian credit market performed broadly in line with offshore credit markets. Lower dealer inventory, coupled with high levels of oversubscription across most of the primary deals in June, drove the spread tightening in Australian credit in June. The credit curve bull-steepened over the month as the Term Funding Facility drew to an end in June, with Authorised Deposit-taking Institutions (ADIs) looking to find a home for the last $A80bn of the facility available to be drawn down.
Duration and curve
The Fund’s duration positioning remains tactically underweight, as we expect yields could move higher as the Federal Reserve starts to talk about tapering. We have put option structures in place that cover the short if yields move higher from here, and this is expressed in the US exposure as we think the sell-off would be US-led. We trimmed the size of our AU-US spread duration position following the 2021-22 Federal Budget last month and, as the Australian Government continues to spend most of the budget improvement, we believe this leads to a more positive growth outlook.
In curve positioning we have favoured the belly of the yield curve. The Fund is positioned with an overweight to the 4-6 year tenors, while offset by an underweight to the benchmark out to the 3-year point. Since the beginning of the RBA’s YCC policy, yields have been anchored at the very front end of the curve. The RBA’s YCC policy, together with its bond purchasing program, have diminished the potential for active returns in this end of the curve. The curve then steepens up sharply into the 4-6 year tenors, implying a rate hiking cycle which we do not believe can be realised in practice, offering attractive rolldown.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/174208895.pdfMay, 2021
Yields in Australia and the US traded in tight trading ranges over May, drifting slightly lower over the month, though moving in-step and in a relatively similar pattern. The Australian Government released the Federal Budget for 2021/21 in the major event for the month. Market sentiment continued to be buoyed by the prospect of continued strong economic growth amid ultra-easy monetary and fiscal measures, but there was circumspection in market pricing and less unbridled optimism.
US Treasury and Australian Commonwealth Government Bond (ACGB) yields fell slightly lower over the month. The US 10 year yield traded as low as 1.46% after nonfarm payrolls before reaching highs of 1.70% later in May, while the Australian 10 year bond futures implied yield traded between 1.57% and 1.78%. Both regions ended the month with yields slightly lower; the Australian 10 year yield closed 6bps lower at 1.64% while the US 10 year rallied 3bps to 1.60%.
The Australian Government’s Federal Budget 2021-22 was released where the Government’s two-part ‘COVID-19 Economic Recovery Plan’ and ‘Longer-Term Fiscal Sustainability’ spending measures are set to offset the improvements in budget position. The Budget’s 4-year forward horizon revenues and expenses have improved by a cumulative $121.8bn based on the Mid-Year Economic and Fiscal Outlook (MYEFO) in December on better-than-expected economic outcomes, but the government has decided to spend almost $87.7bn of this improvement. The 2020/21 deficit is now estimated to be lower at $161bn, or 7.8% of gross domestic product (GDP), and the 2021/22 deficit estimate is relatively unchanged at $106bn, or 5.0% of GDP. Post budget the Australian Office of Financial Management (AOFM) announced that gross debt issuance will be around $160bn in FY22.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/172665591.pdfApril, 2021
Curves flattened over April from post-pandemic highs and yields began to stabilise, spending most of the month in a relatively narrow trading range. The implied yield on the 10 year Australian bond future ended the month 11.5bps lower at 1.70%, while moves in the front-end were much smaller with the yield on the 3 year futures contract only 2.5bps lower at 0.27%. The Australian Office of Financial Management (AOFM) was back in the market for its final syndicated deal of the financial year, with the states continuing to issue as well. There was more rationality about the economic exuberance on show earlier in the year and whilst local data remained strong, there was more circumspection in market pricing and less unbridled optimism.
Inflation remained low and below central bank targets, with the consumer price index (CPI) for Q1 undershooting expectations. The headline CPI result was only 0.6% QoQ and 1.1% YoY, and the trimmed mean result was 0.3% QoQ and 1.1% YoY. This was materially below the bottom of the Reserve Bank of Australia’s (RBA) target band, and contributed to the modest rally in bonds over the month. The labour market continued to show signs of post-pandemic improvement, with unemployment dropping to 5.6% at the latest release. Anecdotally, Seek, the leading Australian job search website, noted that they have the highest number of jobs online in their 23 years of history and the lowest number of people applying for each job ad since 2012. However, Australia’s JobKeeper program expired at the end of March, with high frequency indicators such as the Australian Bureau of Statistics weekly payrolls and wages having softened in the first half of April.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/171405816.pdfMarch, 2021
The theme of ‘divergence’ has been observed over the past months, with uneven impacts of the pandemic across countries and sectors as well as varied fiscal responses by different governments. Adding to the divergence has been the vaccination rollouts. Amongst developed countries, the UK and US have led the way on vaccine administration, which are enabling the gradual re-opening of their economies. In contrast, Europe has laboured and is now dealing with a third wave of coronavirus and a re-tightening of restrictions. The combined result has caused US rates to shoot higher, led by the 10-year bond yields, and yield curves to steepen sharply. European yields, on the other hand, actually fell by a few basis points. So, for fixed income investors, country selection and positioning were key drivers of performance in the month of March. That said, there should be no allusions to the challenges facing fixed income in 2021, as the volatility across interest rate markets experienced during the first quarter is likely to continue as investors cope with the uncertainties still surrounding the virus, the challenges of the vaccination process and the expected volatility in the month-to-month economic data. Still, supportive policies and a gradual re-opening of economies are combining to underpin risk markets, where credit spreads have remained resilient and close to historic tights.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/170122564.pdfFebruary, 2021
The reflation theme gripped bond markets during February, fuelled by the roll-out of vaccines, the continued surge in oil and copper prices, rising expectations for a large US fiscal package being agreed in March, and the continued strength across the manufacturing sector. Bond yields surged higher and yield curves steepened, with the Antipodean markets leading the charge. It was interesting to observe that credit spreads actually tightened amidst this big move in bond markets, which supports the thought that the movements in yields were generated by a belief in stronger growth rather than an outright fear of sustained higher inflation. Central bankers have weighed into this debate, arguing that the market is re-pricing because of growth. Despite the market bringing forward rate hike expectations, they are maintaining their already stated commitment to keeping policy focused on supporting the recovery.
The Fund underperformed the benchmark this month. While security selection contributed positively to performance, this was offset by duration due to the sharp rise further in bond yields over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/167435629.pdfDecember, 2020
Financial markets ended a tumultuous 2020 with the expectation that the new year will be a pathway to returning to normality. Risk assets continued to rally into year end, buoyed by the news that mass vaccination has begun. But at its core, the rally has been underpinned by the unprecedented monetary and fiscal responses across the globe. Global sovereign yields, in contrast, only edged cautiously higher while embracing the fundamental reality that the global economy has experienced a massive deflationary shock as a result of the pandemic, and that the road to recovery is likely to be long and rocky.
The combination of very low sovereign bond yields and direct central bank support has been driving a search for yield by investors. This was illustrated by the fact that high yield and emerging markets USD-denominated sovereign spreads were back to their February (pre-pandemic) levels despite the significant deterioration in macroeconomic fundamentals. While global sovereign yields are now higher than their mid-year historic lows, the overall level of yields has remained well below their pre-pandemic levels. The Fund outperformed the benchmark this month, driven by security selection and sector rotation. Security selection
The Fund has maintained an overweight to the belly of the Australian Commonwealth Government Bond (ACGB) curve, which offers favourable rolldown given the impact of Yield Curve Control on the front-end. The Fund continues to favour the ultra-long bonds given their steepness relative to global curves, though we have taken advantage of micro relative value opportunities in this space with a modest shortening of the 30 year holdings and offsetting extension of the 20 year holdings. Within the semi-government portion of the Fund, we hold a bias towards the 8 to 12 year maturities where spread curves have been steep due to a supply-demand mismatch for different tenors, as issuers have preferred to term out their debt. The Treasury Corporation of Victoria and New South Wales Treasury Corporation spreads drifted slightly wider following their S&P rating downgrades in early December. Following on from this move, the Fund has been selling Queensland Treasury Corporation holdings into these two issuers, which now offer better value.
The Fund’s outperformance in credit security selection over the month was in part driven by a further retracement in the spreads of higher beta and COVID-impacted names, such as Pacific National, Downer Group and Brisbane Airport, which tightened approximately 30 to 40bps over the month. Meanwhile, given the extent of the rally in low beta financial paper since April, most of the repo-eligible bank paper traded sideways in December. Over the month, the Fund participated in primary deals from issuers including Western Sydney University, University of Wollongong and AMP Life.
The Fund has continued to hold an underweight to the semi-government sector, though the exposure has been held in the 8 to 12 year curve segment, which trades with a higher beta than the rest of the curve. This means the Fund should trade slightly longer than it looks optically. There is still material supply expected to come over the remainder of the financial year, though the impact of this will be partially offset by the Reserve Bank of Australia’s (RBA) asset purchasing program. Spreads were broadly trending sideways into year-end, though there was some issuer-specific widening following the S&P rating downgrades in early December. The Fund’s long credit positioning benefitted performance as the rally in Australian credit continued. Further easing of restrictions and reopening of state borders drove the rally in Australian credit despite a jump in locally transmitted COVID-19 cases, which prompted state border closures in numerous states and new restrictions towards the end of the month. The strong technical tailwind continued to provide strong demand for higher beta assets, which helped drive outperformance in the COVID-impacted sectors.
The Fund has continued to hold an overweight bias to duration, with the long position expressed in the belly of the swap curve. We believe this positioning offers favourable rolldown due to the RBA’s anchoring of the front-end through Yield Curve Control.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/163208896.pdfNovember, 2020
November was a solid month for financial markets, driven by positive news on vaccines and more clarity on the outcome of the US election. During the month, three different vaccine developments released results, which showed efficacy at the upper end of expectations, which has raised hopes for a return to more normal life in 2021, much quicker than that had been expected just a month ago. On the US election, a contested result was a source of concern for investors, and while that spectre was briefly raised in the aftermath, the formal process of transition to President-elect Biden has begun.
Two potential disruptive concerns are being overlooked at present, namely the logistics of distribution and vaccination for the global population, and a split US Congress. The pattern of performance in November was led by risk assets across multiple asset classes. In fixed income, high yield credit led the way, while in currencies it was emerging markets. There was a rotation out of safe havens, with gold (-5.4%) and silver (-4.3%) giving back some of their strong gains of recent months. Notably though, global bond yields were resilient, with both US and European yields ending the month lower and spreads in peripheral Europe becoming tighter. However, New Zealand and Australia were the underperformers as their yields rose over the month.
The Fund outperformed the benchmark this month, driven by security selection and sector rotation
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/161502633-1.pdfOctober, 2020
November was a solid month for financial markets, driven by positive news on vaccines and more clarity on the outcome of the US election. During the month, three different vaccine developments released results, which showed efficacy at the upper end of expectations, which has raised hopes for a return to more normal life in 2021, much quicker than that had been expected just a month ago. On the US election, a contested result was a source of concern for investors, and while that spectre was briefly raised in the aftermath, the formal process of transition to President-elect Biden has begun. Two potential disruptive concerns are being overlooked at present, namely the logistics of distribution and vaccination for the global population, and a split US Congress.
The pattern of performance in November was led by risk assets across multiple asset classes. In fixed income, high yield credit led the way, while in currencies it was emerging markets. There was a rotation out of safe havens, with gold (-5.4%) and silver (-4.3%) giving back some of their strong gains of recent months. Notably though, global bond yields were resilient, with both US and European yields ending the month lower and spreads in peripheral Europe becoming tighter. However, New Zealand and Australia were the underperformers as their yields rose over the month.
The Fund outperformed the benchmark this month, driven by security selection and sector rotation.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/161502633.pdfticker: MAQ0061AU
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release_schedule: Monthly
fund_features:
Macquarie Australian Fixed Interest Fund aims to outperform the Bloomberg AusBond Composite 0+ Yr Index over the medium term (before fees) by using an active investment strategy. It aims to provide regular income and a moderate level of growth.
- The Fund invests in a diversified portfolio of predominantly Australian fixed interest securities including securities issued by government or corporate entities, as well as asset backed securities.
- Uses a disciplined and thorough investment process backed by in-house research and quantitative analysis.
- Derivatives may be used for hedging and active investment purposes.
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Australia
peer_benchmark: Fixed Income - Bonds - Australia Index
broad_market_index: Australian Bond Composite 0-10Y Index
structure: Managed Fund