September, 2023
Yield curves bear steepened significantly over the quarter, with the sell-off in long bonds being driven by a sharp increase in real yields. With the macro backdrop remaining resilient, markets shifted towards Central Bank views that high-rate structures for longer are likely needed to bring inflation back down to target levels.
Rates price action over the quarter saw US 10-year yields increase 73bps, from 3.84% to 4.57%, and AU 10-year yields increase 46bps, from 4.08% to 4.54%. The US 10-year real yield rose 88bps and reached a high of 2.48%, while the AU 10-year real yield rose 36bps. The bear steepening curve also reduced the US curve inversion, with spreads between US 2-year and 10-year yields moving from -105bps to -47bps.
The sell-off in long end yields was driven by several factors, including the BOJ loosening its Yield Curve Control policy, a larger than expected US Treasury borrowing program, a surge in corporate bond issuance and Fitch’s US downgrade to AA+, and concerns around the ability of the US government to avoid a shutdown.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-2-1.pdfAugust, 2023
Yield curves continued to bear steepen in August, led by higher real yields driven by the US Treasury’s large program of bond issuance, the impact of Japan loosening its yield curve control policy, and Fitch’s downgrade of the US from AAA to AA+, all of which increased term risk premia.
During the month, US ten-year bonds reached highs not seen since October last year, with the US ten-year yield peaking at 4.33% during the month. Expectations of rate cuts in the US pushed further out into next year as economic data showed overall continued resilience in the economy and labour market. Fed rhetoric maintained the higher rates for longer message, highlighting that inflation is still too high and that upside risks remain from ongoing services inflation and the energy sector with recent increases in oil prices.
The RBA paused in August, with softer wages and monthly CPI data allowing more time to assess the impact of the tightening cycle to date. Australian ten-year yields reached a high of 4.33% during the month, ending the month at 4.00%.
There are increased concerns over an economic slowdown in China, driven by the property sector and a muted policy response by the Chinese government. The potential risks for the Australian economy were reflected in market pricing, with Aussie iTraxx widening 19 basis points to an intra month high above 90 intra before falling back to 77 by the end of the month.
Weaker economic data coming out of Europe, in particular Germany and the UK, showed increased stagflation risks compared to the US economy, which remains strong.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-1-2.pdfJuly, 2023
July saw a steepening in the back end of yield curves as Japan loosened its Yield Curve Control, allowing long term rates to trade in a wider range, and the US Treasury increased its borrowing estimates for the third quarter of 2023 to over one trillion dollars.
Market pricing reflected an increased probability of a soft landing as inflation eased amid a resilient US economy, overall strong US corporate earnings, and a perceived reduction in recession risk. In contrast, Europe and China are experiencing a more pronounced slowdown. China GDP was +6.3% in July vs +7.1% expected, and Eurozone GDP came in at +0.6%. There is uncertainty around the global impact of a slowing China but there is a growing consensus that it will continue to export disinflation in manufactured goods.
Central bank rhetoric over the month was that additional policy action may be required but that forward guidance would be data dependent from meeting to meeting given the uncertainty around the economic impact of the hiking cycle to date. Although headline inflation continues to fall, core inflation remains sticky, particularly around services, which was evident in the Australian July CPI data. Of particular concern is inflation from housing and rents, as strong demand is being met with supply shortages, reflecting a structural imbalance in the property and construction sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-15.pdfJune, 2023
Markets continue to unwind their expectations around imminent recession risks with continued strong economic data and sticky core inflation, causing markets to push out rate cut expectations from 2023 into 2024.
Term premiums were negative in June as yields moved higher in response to most major central banks continuing to raise rates. Even the Fed’s pause was deemed hawkish, as Powell acknowledged there is more work to do to ensure rates are restrictive enough for long enough to combat inflation. Major yield curves continued to invert.
Market pricing of the US terminal cash rate increased from 5.28% at the end of May to 5.41% at the end of June. Market timing of the terminal rate also pushed it out from July to November. Over the month, there was mixed US economic data, but overall, the data showed the economy remained strong, showing no clear slowdown trend. US housing starts and building permits beat market estimates, as did JOLTS Job openings, non-farm payrolls, ADP employment, and retail sales. GDP came in at 2.0% vs 1.4% expected, and US consumer sentiment was stronger than expected. On the inflation front, core inflation came in higher than expected at 5.3%, but other measures of inflation, including headline and the Fed’s preferred core PCE deflator, came in lower than expected. Unit labour costs, ISM prices paid, and ISM services also came in lower than expected.
There was softer economic data in the Eurozone, with inflation printing lower than expected except for the UK where both headline and core inflation came in stronger than expected and the Bank of England raised rates by 50 basis points. Most European central banks also raised rates, with ECB’s Lagarde providing forward guidance for further hikes. China’s recovery continues to stall. Annual inflation came in at 0.2%, the PBOC cut rates by 10bps, retail sales disappointed, and plans were announced for more stimulus and support for the property sector.
Australian yields were higher in June as the RBA made a hawkish pivot, hiking 25bps as the economy and labour market remained strong. Headline inflation came in lower than expected, driven by sharp falls in energy and travel. However, excluding these categories, inflation increased 0.5% month on month, showing core inflation remains sticky. Credit securities outperformed over the month as spreads narrowed in response to markets pushing out the timing of monetary policy tightening on corporate earnings.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-1-1.pdfMay, 2023
Risk sentiment increased in May, driven by uncertainty around ongoing US debt ceiling negotiations, which saw a resolution towards the end of the month. Despite the ten plus rate hikes delivered by central banks over the past year, there is still a lack of definitive evidence of their impact in the economic data. This, coupled with continued strong wage, labour market, and sticky services inflation saw most major central banks hike 25bps in May. Markets responded by pushing bond yields higher and pricing in a higher rate structure for the remainder of 2023 to be more in line with hawkish central bank rhetoric.
The RBA’s 25bps hike in May was driven by mixed economic data and concerns over a wage price spiral without the productivity gains to match. The Fair Work Commission delivered a 5.75% increase to the minimum wage at the end of May. Rhetoric from the RBA throughout the month suggests the board is reviewing its stance on the tradeoff between preserving the gains made in employment vs their price stability mandate.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-14.pdfApril, 2023
After multiple bank collapses in March, market volatility fell in April. However, markets remain nervous about broader global contagion risks from the US regional banking system. Macro data over the month showed increased risks to a stagflation scenario with elevated inflation and signs of weaker growth. The US continued to see mixed economic data with mixed manufacturing data, lower factory and durable goods orders, lower than expected GDP, mixed services data, higher one year inflation expectations, and stronger retail sales.
The labour market remains resilient despite some weaker data during the month. This was against a backdrop of Fed rhetoric questioning if they have achieved an adequately restrictive cash rate to bring inflation back down to their 2% target and markets trying to pick the peak of the rate hiking cycle. US core inflation levels remain at elevated levels. There was also mixed economic data globally, with lower than expected inflation in Germany and Spain and higher than expected inflation in the UK and France. Domestically, the RBA paused in April, waiting for the quarterly CPI data which showed sticky core services inflation and goods inflation coming off recent peaks. A key takeout from the RBA review was a change in the inflation target to the midpoint of the 2-3% target band and a new monetary policy board to be created.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-13.pdfMarch, 2023
Bond yields rallied, yield curves bull steepened, and credit spreads widened as the collapse of three US banks; Signature Bank, Silvergate Bank, and Silicon Valley Bank (SVB) and Credit Suisse rattled financial markets in March, raising fears of contagion across the banking sector and the broader economy.
The month started with markets pricing in a Fed terminal rate of 5.50% and an RBA terminal rate of around 4.20% off the back of continued strong economic and labour market data and a hawkish Fed reiterating rates would need to be higher for longer to bring inflation back to 2%. Markets were at odds with the Fed, pricing in a hard economic landing in the second half of 2023.
On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the second-largest bank failure in United States history and the largest since the 2007–2008 financial crisis. The response from US regulators and the Fed was swift to minimise the risk of market contagion. US regulators announced that all insured and uninsured depositors at SVB would have access to their funds. The Fed then established a Bank Term Funding Program (BTFP) which offered qualifying US banks the ability to borrow funds for up to 1 year by allowing long term US treasuries to be posted as collateral at par to avoid realising losses. There was also a strong global central bank response with liquidity provisions in addition to the Fed’s discount window liquidity facility. California’s First Republic Bank avoided a potential collapse after a group of firms provided a cash injection.
After the collapse of SVB, Credit Suisse (CS) also faced a similar bank run, which escalated after its largest shareholder, Saudi National Bank, refused to provide additional funding. CS sought assistance from the Swiss National Bank (SNB), and a deal was done for UBS to acquire CS for less than half the market value of its last closing price.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-12.pdfFebruary, 2023
February was characterised by continued stronger than expected global economic data, sticker core and services inflation, strong labour markets and more hawkish higher rates for longer rhetoric from the Fed and other central banks. This has meant markets have pivoted from expecting that central banks were approaching the end of the hiking cycle, that peak inflation had past and a likely soft economic landing this year, to the prospect of reinflation and an extended hiking cycle. As a result, markets repriced terminal rates higher and pulled back on rate cut expectations for this year. In the US, unemployment reached a 50-year low, reiterating the strength of the labour market. After a spectacularly strong US payrolls print, markets also pushed out the timing of recession risks. Wages growth also remained strong, with the Fed acknowledging that the current level of wages growth is inconsistent with their 2% inflation target. This highlights the challenge central banks face in determining appropriate monetary policy settings to create a sufficient tightening in financial conditions to bring inflation back down to target while balancing the impact on the economy. The Bank of England and European Central Bank both hiked 50bps in February and flagged further hikes after upgraded growth forecasts and higher than expected inflation across the Eurozone. The RBA maintained its 25bps hike cadence after monthly CPI data suggested inflation had peaked, unemployment rose, tighter financial conditions impacted household consumption, and softer Wage Price Index (WPI) data suggested the risks of a wage price spiral remain low for now. However, it is recognised there was some seasonality in the unemployment data and limited scope of the monthly CPI and WPI metrics. As at the end of February global and domestic credit spreads remained contained with recession risks being pushed out off the back of continued strong economic data over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-11.pdfJanuary, 2023
Key Drivers of Portfolio Performance:
• The 3-10 yield curve flattened, detracting from returns
• Corporate spreads narrowed 10-15bps, contributing strongly to positive excess returns
• Sub debt tightened 10bps, adding 3bps to excess returns
• CDS protection detracted from returns as spreads compressed
• Yield enhancement and rolldown of quality investment-grade bond holdings added to returns.
December, 2022
The major thematic that played out in December was one of higher rate structures for longer. Australian and major global yield curves bear steepened as high inflation persisted, the Bank of Japan surprised by increasing its 10-year yield curve control rate, and China abruptly abandoned its zero-COVID policy. Central bank rhetoric remained hawkish, acknowledging there was a long way to go to bring inflation towards target despite the most aggressive rate hiking cycle in decades increasing the risk of recession.
Despite some dovish Fed commentary during the month stating it may soon be appropriate to slow the pace of rate hikes and not wanting to overtighten, the overall message remained hawkish as Fed members acknowledged that rate structures may need to be higher for longer and terminal rates will likely be higher than expected. The key risk highlighted by the Fed was their concern over inflation expectations becoming unanchored if there is a slow return to normal levels of inflation. Similarly, the ECB stated that significant rate rises at a steady pace were still to come. Over the month, the Fed, ECB, Bank of England, and Bank of Canada all raised rates by 50bps while the RBA hiked 25bps.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-9.pdfNovember, 2023
Key Drivers of Portfolio Performance:
• A curve flattening position at the front end of the curve added to returns, while a 3s10s steepener detracted
• Corporate spreads narrowed, contributing to returns
• Senior banks narrowed, contributing to returns
• Bank sub debt widened, detracting from returns
• CDS protection detracted 8bps as iTraxx tightened 40bps
• Yield enhancement and rolldown of quality investment grade bonds added to returns.
October, 2022
Portfolio Review
Key Drivers of Portfolio Performance:
• The 5-10 yield curve steepened 9bps adding 6bps
• Corporate spreads widened 10-20bps detracting 21.3bps
• Senior banks widened 5-30bps detracting 10bps
• Bank sub debt widened 10-25bps detracting 6.5bps
• CDS protection detracted 8bps as iTraxx tightened 17bps
• Yield enhancement and rolldown of quality investment grade bond holdings added 11.3bps.
Portfolio Activity and Positioning
• Bought ANZ 11/27 hedged with 3yr futures
• Bought NAB 11/26 sub debt
• We have maintained the liquid structure of the Fund.
September, 2022
Key Drivers of Portfolio Performance:
• With a short duration, the 25-40bps rise in bond yields added 1.5bps.
• Corporate spreads widened 5-10bps detracting 8bps.
• Senior banks widened 4-15bps detracting 5bps
• CDS protection added 20.5bps as iTraxx widened 34bps
• Yield enhancement and rolldown of quality investment grade bond holdings added 12bps.
Portfolio Activity and Positioning:
• Reduced the short duration by 0.05 during market weakness
• We have maintained the liquid structure of the Fund.
August, 2022
Key Drivers of Portfolio Performance:
• The 40-60bps sell-off in interest rates added 3bps due to short duration positioning
• Corporate and bank spreads narrowed 5-10bps adding 7bps
• Sub debt narrowed 10-30bps adding 6bps
• CDS hedges detracted 4bps
• The flattening of the 3-10yr curve detracted 3bps but this was offset by the steepening of the 3-5yr curve which added 2bps • Yield enhancement and rolldown of quality investment grade bond holdings added 12bps.
July, 2022
Key Drivers of Portfolio Performance:
• The 25bp flattening of the 3-10yr curve detracted 11.5bps
• Corporate spreads widened 5-15bps detracting 16.5bps
• Yield enhancement and rolldown of quality investment grade bond holdings added 11.4bps
• Bank senior fixed tightened 10-18bps adding 4 bps.
Portfolio Activity and Positioning:
• We have maintained the liquid structure of the Fund.
June, 2022
• Given the 150-200bps rise in bond yields since year-end we have steadily reduced our short duration positions as market yields moved closer to our fair value levels (refer scenario analysis below). However the strong bond rally in late June provided an opportunity to reset some short positions.
• Both the Fed and RBA appear committed to aggressively get on top of inflation. Accordingly markets are pricing December 2022 cash rates of 3.30% for the Fed and 3.10% for the RBA.
• The very aggressive front-loaded tightening from the Fed and RBA could well slow economic growth rapidly, with markets now pricing a 40% probability of a recession in mid-2023. Rapidly slowing economic data or very negative consumer responses to rising rates could see central banks holding back on the pace of tightening.
• We believe that close to the maximum tightening has been priced in and the risk is that the pace of tightening slows, creating a rally in short bonds and a steepening of the yield curve.
• To cover both the “fast” and “slower” RBA tightening scenarios, we are overweighting the 2-4yr segment of the yield curve versus the 10yr+ segment.
October, 2021
The tumult in bond markets seen through September reached its crescendo in October, with a significant sell-off in local front-end rates towards the end of the month. Both risk appetite and the functionality of the domestic bond market deteriorated rapidly following the release of the Q3 Australian CPI report. While the headline CPI was broadly in line with consensus at 0.8% qoq, the trimmed mean surprised to the upside, returning core inflation inside the 2-3% target band for the first time since 2015
Global The RBA’s November Statement of Monetary Policy summarises global growth conditions very well: “Conditions are in place for a sustained global recovery. The spread of the Delta variant of COVID-19 through the middle of the year had set this recovery back in some countries, but only temporarily. Rapid increases in vaccination coverage in many countries has allowed restrictions to be eased, and economic activity has bounced back strongly. Alongside these better health outcomes, expansionary fiscal and monetary policy have assisted the recovery and continue to support the outlook. Most advanced economies are expected to return to their prepandemic paths for output next year, but a number of emerging market economies are likely to still be short of pre-pandemic trends. Health-related risks remain an uncertainty for the period ahead.
Australia The RBA’s November Statement of Monetary Policy provides a bullish forecast for Australia’s near-term growth: “Now that vaccination rates are rising quickly to very high levels, and restrictions on activity have been eased significantly, the economy is recovering rapidly. The speed of this recovery is consistent with the strong underlying momentum in the economy prior to the outbreak. GDP is expected to grow by around 3 per cent over 2021. Growth is expected to be around 5½ per cent over 2022, before returning to around 2½ per cent over 2023.”
Breakeven inflation (BEI) measures in Australia and US diverged once again in October, with a material underperformance of local BEIs into month end, following a significant sell-off across all rates. With Australian 10yr BEIs nearer to 2%, inflation expectations were momentarily impacted by strained market liquidity and the prospect of RBA rate hikes being brought forward. With liquidity once again restored and rate expectations moderating, there is a reasonable prospect for higher BEIs into year end.
October capped a month of widening in credit. In the wake of APRA’s Commitment Liquidity Facility announcement, bank primary issuance served to re-price secondary funding curves wider. Additionally, the RBA’s month-end capitulation on Yield Curve Control also resulted in broad based re-pricing of credit. However, this repricing was mainly via volatility in risk-free and swaps curves, with moves on a spread basis more muted in nature.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/investment-report-antares-income-fund-2.pdfSeptember, 2021
Australian shares generated a solid 1.8% return for the past three months, tempered by a disappointing September. The energy sector surged by 9.3% given the hike in oil and gas prices as supply shortages emerged. The Information Technology sector also delivered a strong quarterly return largely due to the takeover bid by tech giant Square for Afterpay. However, the Resource sector disappointed with a -9.3% return given the sharp fall in iron ore prices with weaker Chinese demand and the question marks around Chinese property developer Evergrande.
Australian Equities Fund
The Antares Australian Equities Fund returned 4.3% (net of fees) for the September 2021 quarter, outperforming its benchmark S&P/ASX200 Total Return Index return1 by 2.6%. The main contributors to quarterly performance were decisions not to own Fortescue Metals or Rio Tinto and an overweight holding in South32. Detracting from performance were decisions not to own Sydney Airport and Wisetech Global and an overweight holding in Northern Star Resources.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/antares_quarterly_review251021.pdfDecember, 2020
Key Drivers of Portfolio Performance:
• Credit spreads were mixed for the month with the vaccine driven “reflation” credits such as cyclicals, airports and office rallying 10-20bps adding 10ps.
• In contrast COVID defensives such as supermarkets, industrial property and infrastructure had a moderate spread compression of 2-7bps, adding 4bps.
• Banks widened 1-3bps, detracting 1bp.
• Bank sub debt tightened 8-15bps adding 6bp
• Bought CDS protection on iTraxx and major banks together detracted 1.6bps.
• Semis tightened 3bps adding 0.5bp.
• A flattening yield curve position detracted 3.5bps as the yield curve steepened from 2-30yrs.
• Yield enhancement and roll down of quality investment grade bond holdings added 11ps.
asset_class:
asset_category:
peer_benchmark:
broad_market_index:
manager_contact_details: Array
ticker: PPL0028AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.antarescapital.com.au/home/personal-investor/fixed-income/antares-income-fund/resources
Investment Report
fund_features:
Antares Income Fund aims to provide regular income and a return (after fees) that exceeds the Benchmark over rolling three-year periods. The fund strategy is not currently available for this fund. The Fund provides investors with a highly diversified exposure to a range of cash, cash equivalent, and fixed interest and debt securities.
structure: Managed Fund