June, 2023
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Fixed income markets are acutely focused on the outlook for inflation and the reaction by central banks. These two themes were central to our debates within the Macquarie Fixed Income team’s recent global Strategic Forum. From a macroeconomic perspective, a deep dive into the drivers of aggregate demand and aggregate supply has enabled us to understand that the currently high inflation has been largely a product of a slow recovery in supply and demand being broadly back to the pre-pandemic trend. Looking into 2022, we asked what are the big demand drivers and noted that policies – both monetary and fiscal – were moving in the opposite direction from those of the past two years. Gradually, we expect this action to drag demand lower. We note the narrative that the consumers can drive demand higher, fuelled by higher wages and excess savings, but see that there is little actual evidence in the spending data that supports an above-trend consumption. Finally, on the supply side, we note that the pandemic needs to pass for a sustainable improvement to take place, and recent evidence gives optimism for progress through this year.
Thus, we expect inflation to trend lower in 2022, notably in the second quarter and more noticeably later in the year. This should offer respite the investor and central bank fear that inflation is a structural problem, but this path is not without risks from the virus, factors such as oil as well as policy (error). This implies a tricky investment outlook path to navigate, where periods of volatility spikes should be expected. We also recognise the investors’ need for yield. During 2021, our investment approach was cautious, holding low levels of duration and low levels of exposure to risk assets. This gives our team the opportunity to take advantage of expected volatility in 2022 to add duration and risk either from both our top-down and bottom-up processes
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-1-3.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/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-11.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/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-9.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
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-1-2.pdfAugust, 2021
The Fund outperformed the benchmark this month, driven by sector rotation and duration and curve positioning. Sector rotation The Portfolio’s sector positioning has remained slightly underweight semi-government bonds, though we have covered part of this position during the month. We have been adding in 3 year semi-government bonds, which have traded at an attractive spread over bond given the impact of unconventional Reserve Bank of Australia (RBA) policy on the front end of the Australian Commonwealth Government Bond (ACGB) curve. Spreads have been drifting wider following the announcements of the state governments’ bigger-than-expected funding tasks, and we continue to view that spreads can go wider still given the RBA’s reduction in weekly semi-government purchases and eventual taper. The Fund’s overweight credit positioning contributed positively to performance relative to the benchmark in August as the slight tightening of the credit spreads helped drive the outperformance. The Fund also continued to benefit from the bull-steepening of the Australian credit curve as the credit positioning continued to be concentrated in the front to mid part of the curve. Duration and curve
The Fund’s duration positioning has remained tactically underweight, with this position still predominantly expressed in the US. Yields have begun to stabilise this month, though the trend was still slightly lower in yield. We have traded the AU-US spread around this month and this added value as Australian rates outperformed. We continue to favour the underweight position in US duration as yields tend to seasonally move higher into year-end as supply picks up in the US. Security selection
Within ACGBs, the Fund has remained overweight to the ultra-long bonds given the steepness relative to global curves and attractiveness to foreign investors on a hedged yield basis. Within the semi-government holdings, we have favoured the 3-year part of the curve, which traded at an attractive spread over bond due to the impact of the RBA policy on the ACGB curve. We have also been active in swap, implementing box flatteners which we believe have scope to perform due to the roll optics.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-8.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 i
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-7.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%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-6.pdfApril, 2021
Some challenges continue to present in fixed income markets. Starting with the facts, during April US President Biden unveiled two infrastructure packages targeted at an additional $US4tn of stimulus, following hot on the heels of the third fiscal support package since the pandemic hit. In the US, as vaccine administration accelerates, new cases fall and pressure on hospitals eases, the process of re-opening the economy continues to be supported. Sentiment surveys rose, employment grew, and inflation jumped to 2.6%. Equities also surged to another new high and credit spreads tightened to pre-pandemic levels. Yet, bond yields were lower on the month.
Risk markets have been running on the growth recovery and the strength so far coming through in Q1 earnings. While bond yields marched higher through 4Q20 and 1Q21, reflecting the lifting of deflationary fears, price actions have suggested that inflation may not be as big a risk as many economists are suggesting. Central banks have dismissed the current and expected rise of inflation as transitory, citing deeps scars from the pandemic that are at work to add to the pre-existing structural downward pressures on inflation. Calming words echoed by most central banks have quelled, but not eliminated, the fears in bond markets that monetary stimulus can be tapered.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-5.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. The Fund outperformed the benchmark this month, driven by duration and curve as well as sector rotation
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-1-1.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. The Fund outperformed the benchmark this month, driven by duration and curve as well as sector rotation.
File:February, 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/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-3.pdfJanuary, 2021
The new year did not start off quietly. Surging virus cases, new variants and pressure on hospitals have caused governments to re-tighten restrictions. In parallel, the vaccination process has begun but there is significant divergence taking place between countries in terms of supply and administration. The very long US election process came to a head with the Georgia Senate run-off early in the month. The Democratic party obtained both seats and, with the casting vote of the Vice-President, have won control of Congress. That said, the margin is wafer-thin, and is not the blue-wave sweep that pollsters had suggested. This reality was overlooked by the markets as expectations are for further near-term fiscal stimulus.
All of these events did not stop equity markets from surging to new highs in the US and credit spreads from tightening back towards prepandemic levels. Bond yields rose and yield curves steepened as the longer-maturity bonds underperformed, but rate markets are nowhere near their pre-pandemic levels. This has put bond markets in the cross-hairs of debate in terms of the outlook for 2021, where optimists are forecasting an inflation surge and higher interest rates. Others, like ourselves, are sceptical particularly as bond markets have a long history of accurately reflecting the reality.
The Fund underperformed the benchmark this month. While security selection contributed positively to performance, this was offset by duration as bond yields rose over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-2.pdfDecember, 2020
Most asset markets performed well in December, wrapping up a remarkable year of financial market performance. Most sectors in fact closed out the year close to or better than levels from the beginning of 2020, recovering historically steep losses experienced in almost all asset classes in March. The rebound of the second half of 2020 continued in December. Many markets set new highs (or tights in spreads, for credit markets) even as the economic fundamentals lagged, while virus news got steadily worse in the northern hemisphere. Overall, USD IG spreads closed the year at 96bps, the S&P 500 Index finished up 16%, and the ‘tech-heavy’ NASDAQ was up 43%, far removed from the pain earlier in the year and an unprecedented rebound.
The compression in spreads continued to be the theme for credit markets in December, repeating similar moves in November as investors embraced the vaccine progress and sought ‘laggard’, virus-impacted sectors. In this vein, high yield (HY) outperformed IG credit and the lowest rung of HY (CCC-rated) outperformed all other rating bands, tightening by 90bps (single-A spreads only tightened by 6bps, in comparison). Virus-impacted sectors were the outperformers. IG airlines tightened by 35bps, with similar moves in hotel and REIT names. Interestingly, heavily impacted sectors such as airlines performed well against a deteriorating virus news backdrop. New lockdowns and tighter restrictions were announced across Europe, with some regions returning to restrictions almost as severe as those in the initial weeks of the pandemic. In the US, case counts and hospitalisations broke all previous records. In addition, the difficulties of implementing mass vaccinations became steadily more apparent, with progress in delivering the vaccine (and even providing approvals) moving much slower than target pace. Investors have clearly continued to take a longer-term view that the most directly impacted sectors will recover strongly once a vaccine is rolled out, and that another poor quarter or two of performance has limited bearing on the long-term investment thesis. Politics were again a theme during the month.
Firstly, an 11th hour Brexit deal was finalized after years of negotiations and numerous delays. While the details of the deal and its implementation are not immediately positive, the fact that a deal was done removed a significant tail risk, particularly for UK-linked assets. More importantly, from an overall market perspective, the US finally agreed a new $900bn round of fiscal stimulus, including direct payments and support to specific impacted industries. The politics and the tedious negotiations involved in getting these agreements in place have indicated the difficulty of continuing to provide much-needed, long-term support to individuals and businesses hit hard by the pandemic and subsequent lockdowns. Overall, credit markets finished on a strong note, with lower issuance volumes and market liquidity reflecting the traditionally quieter holiday period. In Europe, in particular, total credit issuance volumes were only €9bn and occurred almost all in the first week of the month, a significant step down from previous months. Similarly, but less extreme in the US, $42bn was issued, bringing the year’s total to over $1.8tn, by far a record.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Australian-Fixed-Interest-Fund-Performance-Report-PRRP-MAFIF-ANZ-1.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.
ticker: MAQ0211AU
commentary_block: Array
factsheet_url:
The Report is out monthly, but only March, June, September, and December that have the commentary.
| Macquarie True Index Australian Fixed Interest Fund | Monthly report |
release_schedule: Quarterly
fund_features:
Macquarie True Index Australian Fixed Interest Fund launched in 2000 and aims to provide investors with pre-tax returns that equal the returns of the Bloomberg AusBond Composite 0+ Yr Index (Index), known as ‘True Indexing’.
- Investing in fixed interest, derivatives (including options, futures, warrants and forwards) and cash, either directly or through underlying funds that are managed by members of the Macquarie Group (Underlying Investments) with the aim of providing exposure that closely resembles the exposure of the Index.
- Entering into a swap agreement with Macquarie Financial Holdings Pty Limited (Swap Counter-party).
- Low to medium risk/return level.
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