September, 2023
After fees and expenses, the Fund returned -1.56% to underperform the benchmark by 4 basis points (bps).
The fund maintained an overweight duration position throughout the month, at around 0.62-0.64 years. The overweight duration position was the main detractor to the fund’s performance. We look to maintain the overweight duration position in coming months, anticipating lower yields as the Reserve Bank of Australia (RBA) continues to hold interest rates at restrictive territory, dampening growth and bringing down inflation. We may consider reducing the overweight position after yields fall, however we don’t anticipate that to occur in the near term.
The fund's strategic positioning, which anticipated a yield curve steepening (widening gap between the 3-year bond yield and the 10-year bond yield) contributed positively to the fund's performance relative to the benchmark. The Fund is overweight the shorter maturities out to 3 years and underweight the 5–10-year bonds. We will also look to reduce this position in coming months if we assess that the yield curve has reached a level of steepness that we consider appropriate given the prevailing market conditions.
Sector positioning favours an overweight in spread, mostly senior financials and Residential Mortgage-Backed securities as well as high grade issuers such as state governments, supranationals and Australian government guaranteed borrowers which have remained attractive relative to government bonds. The slight contraction of spreads this month have also contributed to the fund’s performance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Sept-2023.pdfAugust, 2023
After fees and expenses, the Fund returned 0.95% to outperform the benchmark by 22 basis points (bps).
The fund maintained an overweight duration position throughout the month, starting at 0.63 years overweight and ending at 0.64 years overweight. The overweight duration position was the main contributor to the fund’s outperformance. Looking ahead in the coming months, we may consider reducing the portfolio's duration if yields experience significant declines. However, we do not anticipate such a scenario in the near term.
The fund's strategic positioning, which anticipated a yield curve steepening (widening gap between the 3-year bond yield and the 10-year bond yield) contributed positively to the fund's performance relative to the benchmark. The Fund is overweight the shorter maturities out to 3 years and underweight the 5–10-year bonds. We will also look to reduce this position in coming months if we assess that the yield curve has reached a level of steepness that we consider appropriate given the prevailing market conditions.
Sector positioning favours an overweight in spread, mostly senior financials and residential mortgage-backed securities as well as high grade issuers such as state governments, supranationals and Australian government guaranteed borrowers, which have remained attractive relative to government bonds. The slight contraction of spreads this month have also contributed to the fund’s performance
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Aug-2023.pdfJuly, 2023
After fees and expenses, the Fund returned 0.76% to outperform the benchmark by 24 basis points (bps).
The fund held an overweight duration position throughout the month, which was one of the main contributors to outperformance. The fund also saw gains from maintaining a position that anticipated a steeper yield curve (an increase in the difference between the 3-year bond yield and the 10-year bond yield). We would look to decrease duration if yields continue to fall significantly, however we don’t see that occurring in the near term. The Fund is overweight the shorter maturities out to 3 years and overweight 10–15-year government bonds.
Sector positioning favours an overweight in spread, mostly senior financials and Residential Mortgage-Backed securities as well as high grade issuers such as state governments, supranationals and Australian government guaranteed borrowers which have remained attractive relative to government bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jul-2023.pdfJune, 2023
After fees and expenses, the Fund returned -2.10% to underperform the benchmark by 14 basis points (bps).
The fund held an overweight position throughout the month, which was the main contributor to underperformance. The fund increased its position from 0.44 years overweight duration to 0.66 years, on the expectation that we are now towards the end of the rate hiking cycle. If yield do rise again we would look to increase duration further at the top of the recent range in bond yields (around 4-4.1%).
During the month 10-year yields were higher at 4.02%, which was 42 basis points higher over the month. The Fund is overweight the shorter maturities out to 3 years and overweight 10–15-year government bonds.
Sector positioning favours an overweight in spread, mostly senior financials and Residential Mortgage-Backed securities as well as high grade issuers such as state governments, supranationals and Australian government guaranteed borrowers which have remain attractive relative to government bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jun-2023.pdfMay, 2023
After fees and expenses, the Fund returned -1.30% to underperform the benchmark return of -1.21% by 10 basis points (bps) in May.
The Fund maintained an overweight duration position throughout the month, which had a negative impact on its performance. The fund has been holding a core position of approximately 0.40 years overweight duration on the expectation that we are now towards the end of the rate hiking cycle. In the event that yields rise again, we would consider further increasing our overweight duration position at the top of the recent range in bond yields (around 4%). The Fund is overweight the shorter maturities out to 3 years and overweight 10–15-year government bonds.
Sector positioning favours an overweight in credit, mostly senior financials and Residential Mortgage-Backed securities as well as high grade issuers such as state governments and Australian government guaranteed borrowers which have remained attractive relative to government bonds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-May-2023.pdfApril, 2023
After fees and expenses, the Fund returned 0.29% to outperform the benchmark by 10 basis points (bps).
The Fund held an overweight duration position throughout the month which was neutral for performance as yields rose by only a few basis points on the month. The fund has been holding a core position of approximately 0.50 years overweight duration on the expectation that we are now towards the end of the rate hiking cycle, and yields have peaked.
The main duration positions of the Fund are held in bank bills, 3 year bonds, and 10-15 year government bonds. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and is overweight Semi-government issuers. The Semi-government position is overweight in the 10-15 year maturities, as the currently wide swap spreads make them attractive versus government bonds.
Credit spreads tightened in April, after widening from the volatility created by the US bank defaults. The Fund held an overweight to credit, which has been focussed in the 0-5 year maturities and is overweight both Banks and Residential Backed Mortgage Securities as there has been little corporate issuance this year. Credit positioning was positive for the month as spread tightening contributed to performance, and further added via the additional running yield of the sector.
File:February, 2023
After fees and expenses, the Fund returned -1.38% to underperform the benchmark by 5 basis points (bps). The Fund held an overweight duration position throughout the month which had been reduced in the rally that occurred during January. The fund has been more active with its duration positioning, mainting an overweight position, but reducing its exposure as 3 year yields hit 3% and aiming to extend again at over 3.70%.
We continue to hold an overweight duration position as we believe the RBA is approaching the end of its rate hiking cycle, as the cash rate is now in restrictive territory, which should make any sell-off from these levels harder to achieve. Despite this the RBA continues to keep hiking the cash rate and stating that additional hikes will likely be necessary. During the month 10 year yields sold off to to finish at 3.85%, 30 basis points higher than where they started. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the curve is flat. Overall duration was a detractor for the month. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and is overweight semi-government issuers. The semi-government position is overweight in the 7-15 year maturities, as the currently wide swap spreads make them attractive versus government bonds.
Credit spreads tightened in February, after widening through the second half of 2022. The Fund held an overweight to credit, which has been focussed in the 0-5 year maturities and is overweight Banks as there has been little corporate issuance this year. Credit positioning was positive for the month as spread tightening contributed to performance and provided additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Feb-2023.pdfJanuary, 2023
After fees and expenses, the Fund returned 3.10% to outperform the benchmark by 35 basis points (bps). The Fund held an overweight duration position throughout the month which had been extended when the bond market sold off in December. As bonds rallied aggressively in January the duration of the fund was reduced, but still maintained an overweight position. We continue to hold an overweight duration position as we believe the market is pricing a higher terminal cash rate than is possible and as the market approaches the end of the hiking cycle 3 year bonds should find it harder to sell off.
Despite this the RBA continues to keep hiking the cash rate, with inflation printing 7.8% for the 4th Quarter of 2022 giving them the ability to continue moving rates higher if they believe it is necessary. During the month 10 year yields where volatile, rallying aggressively over the month to finish at 3.55%, 52 basis points lower than where they started. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep.
Overall duration was a key performer for the month. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and is square Semi-government issuers. The Semi-government position is overweight in the 7-15 year maturities, as the currently wide swap spreads make them attractive versus government bonds. Credit spreads tightened in January, after widening through the second half of 2022. The Fund held an overweight to credit, which has been focussed in the 0-5 year maturities and was extended through the back end of 2022. Credit positioning was positive for the month as spread tightening contributed to performance and provided additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jan-2023.pdfDecember, 2022
After fees and expenses, the Fund returned -2.04% to outperform the benchmark by 1 basis point (bp).
The Fund held an overweight duration position, however this was reduced throughout the month as short dated bonds rallied towards 3.00%. We continue to hold an overweight duration position as we believe the market is pricing a higher terminal cash rate than is possible. The Australian bond market has become extremely volatile over the past six months as it comes to grips with how fast and how far the RBA will move the cash rate. The market pricing expects a cash rate of approximately 4.0% in 6 months’ time, which would complete one of the fastest rate tightening cycles in history. During the month, yields where volatile, rallying for the first part of the month before ending the month at 4.075%, 54 basis points higher than where they started. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep. Overall duration was a detractor for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 5-10 year maturities, as the borrowing profiles sees the State Government issuers consistently tap the market. Credit spreads consolidated in December, as swap spreads stopped widening. The Fund held an overweight to credit, which has been focussed in the 0-5 year maturities in order to keep the effects of spread volatility low. Credit positioning was positive for the month as spread tightening contributed to performance and provided additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Dec-2022.pdfNovember, 2022
After fees and expenses, the Fund returned 1.95% to outperform the benchmark by 83 basis points (bps). The Fund held an overweight duration position throughout the month as the market continues to price a terminal cash rate higher than we believe will occur, making bonds across the curve relatively attractive.
The Australian bond market has been extremely volatile over the past six months, however rates have backed away from their extremes and looks to have found a peak. The market pricing expects a terminal cash rate of approximately 3.5-4%, which looks slightly too high now that the RBA has begun to slow down the pace of their interests rate increases and economic information has begun to slow.
During the month, yields rallied, with 10 year bonds falling approximately 23 basis points to end the month at 3.53%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep.
Overall duration was a key contributor for the month. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds a small underweight to Semi-government issuers. The Semigovernment position is short in the 3-7 year maturities, which has been progressively moved towards square over the past three months as spreads widened. Credit spreads tightened in November, reversing some of the widening that has occurred over the past 6 months. The Fund held an overweight to credit, which has been focussed in the 0-5 year maturities in order to keep the effects of spread volatility low. Credit positioning was positive for the month as spreads tightened and provided additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Nov-2022.pdfOctober, 2022
After fees and expenses, the Fund returned 1.22% to outperform the benchmark by 29 basis points (bps). The Fund held an overweight duration position throughout the month as the market continues to price higher terminal rates than we believe probable.
The Australian bond market has become extremely volatile over the past six months as it continues to come to grips with how far and how fast the RBA will move the cash rate. The market pricing expects a terminal cash rate of approximately 4%, which looks slightly too how now that the RBA has begun to slow down the pace of their interests rate increases. During the month, yields rallied, with 10 year bonds falling approximately 25 basis points to end the month at 3.765%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep. Overall duration was a key contributor for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 3-7 year maturities, as this is where the RBA concentrated their Quantitative Easing (QE) buying and offers little yield pick up when compared to swap rates. Credit spreads widened in October, continuing their trend of the past six months. The Fund held an overweight to credit, which has been focussed in the 0-3 year maturities in order to keep the effects of spread volatility low. Credit positioning was negative for the month as spread widening wiped out the additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Oct-2022.pdfSeptember, 2022
After fees and expenses, the Fund returned -1.85% underperforming the benchmark by 49 basis points (bps).
The Fund held an overweight duration position throughout the month as the market continues to price higher terminal rates than we believe probable. The Australian bond market has become extremely volatile over the past six months as it comes to grips with how fast and how far the RBA will move the cash rate. The market pricing expects a cash rate of approximately 3.5% in 6 months’ time, which would be one of the fastest cash rate moves in the past 20 years. During the month, yields continued their moves higher, with 10 year bonds ending the month at 3.915%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep. Overall duration was a key detractor for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 5-10 year maturities, as this is where the RBA concentrated their Quantitative Easing (QE) buying and is the most prone to spreads widening. Credit spreads widened in September, continuing their trend of the past few months. The Fund held an overweight to credit, which has been focussed in the 0-3 year maturities in order to keep the effects of spread volatility low. Credit positioning was negative for the month as spread widening wiped out the additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Sept-2022.pdfAugust, 2022
After fees and expenses, the Fund returned -2.78% to underperform the benchmark by 24 basis points (bps). The Fund held an overweight duration position throughout the month as the market continues to price higher terminal rates than we believe are likely. The past few months have seen interest rates move in extremely volatile ways, with August continuing that trend. Throughout the month the market continued to grapple with where the terminal cash rate will end up, with bond yields selling-off throughout the month.
During the month the Reserve Bank of Australia (RBA) delivered a third consecutive 50 basis point hike, taking the cash rate to 1.85% and while they signalled that there was more to come, early signs that they are getting ready to slow down appeared. 10 year bonds ended the month at 3.60%, some 54 basis points above where they started, while 3 year bonds ended the month at 3.21%, rising 55 basis points over the month. The Fund holds a steepening curve position, with the majority of its duration exposure in 3 year bonds and bank bills, as the frontend of the bond curve is extremely steep. Duration was a key detractor for the month, as the volatile movement in rates continues. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers. It also holds an overweight to 0-5 year corporate bonds and has an underweight to semi-government issuers.
The semigovernment short position has been progressively reduced over the past two months as spreads widened in this sector, and any further widening will see the Fund move back towards a neutral position. Credit spreads rallied in August after a weak six month period, however spreads still remain at relatively wide levels. The Fund held an overweight to credit, with positions added over the past three months to take advantage of widening spreads. Credit positioning was positive for the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Aug-2022.pdfJuly, 2022
After fees and expenses, the Fund returned 3.82% to outperform the benchmark by 46 basis points (bps).
The Fund held an overweight duration position throughout the month as the market continues to price in higher terminal rates than we believe are likely. Throughout the month the market grappled with where terminal cash rates will end up, with bond yields staging a sell-off before rallying substantially into month end. During the month the Reserve Bank of Australia (RBA) delivered a second consecutive 50 basis point hike, taking the cash rate to 1.35% and signalling that more was to come. 10 year bonds ended the month at 3.06%, some 60 basis points below where they started, while 3 year bonds ended the month at 2.66%, falling 46 basis points over the month.
The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep. Duration was a key performer for the month, making back the lost performance from the prior month. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers, holds an overweight to 0-3 year corporate bonds and has an underweight to semi-government issuers. The semigovernment position is short in the 5-10 year maturities, as this was where spreads performed their strongest in 2021 and state governments have been looking to fund. As spreads have widened in semi-government bonds we have begun reducing the underweight and seek to add bonds in the 5 and 10 year maturity points. Credit spreads rallied in July after a weak June, with a risk-on tone occurring globally. The Fund held an overweight to credit, with positions added over the past three months to take advantage of widening spreads. Credit positioning was positive for the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jul-2022.pdfJune, 2022
After fees and expenses, the Fund returned -1.91% to underperform the benchmark by 43 basis points (bps). The Fund held an overweight duration position throughout the month as the market continues to price higher terminal rates than we believe probable. The Australian bond market has become extremely volatile over the past six months as it comes to grips with how fast and how far the RBA will move the cash rate. The market pricing expects a cash rate of over 3.0% in 18 months’ time, which would be one of the fastest cash rate moves in the past 20 years.
During the month, yields continued their moves higher, with 10 year bonds ending the month at 3.72%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds and bank bills, as the front-end of the bond curve is extremely steep. Overall duration was a key detractor for the month as additional positions were added as yields sold off. The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 5-10 year maturities, as this is where the RBA concentrated their Quantitative Easing (QE) buying and is the most prone to spreads widening. Credit spreads continued their sell-off in June, with spread widening occurring globally. The Fund held an overweight to credit, with positions added as new issuers offer relatively large new issue premiums. Credit positioning was negative for the month as spread widening wiped out the additional running yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jun-2022.pdfApril, 2022
After fees and expenses, the Fund returned -1.64% to underperform the benchmark by 16 basis points (bps).
The Fund held an overweight duration position throughout the month as the market has been pricing in rate hikes to a higher terminal level than we believe possible. Market pricing now expects a cash rate of over 3.30% in 18 months time, which would be one of the fastest cash rate moves in the past 20 years. During the month, yields continued their moves higher, with 10 year bonds ending the month at 3.16%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds as the front-end of the bond curve is extremely steep. Overall duration and curve positioning was a key detractor for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 5-10 year maturities, as this is where the RBA concentrated their Quantitative Easing (QE) buying and is the most prone to spreads widening. Credit spreads sold-off slightly during April, with spread widening occurring globally. The Fund held an overweight to credit, which has been added as spreads widened. New issuers are offering substantial new issue premiums, with new issues from Volkswagen and Athena good examples of this. Credit positioning was negative for the month as we continued to accumulate bonds into the spread widening.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Apr-2022-1.pdfMarch, 2022
After fees and expenses, the Fund returned -1.64% to underperform the benchmark by 16 basis points (bps). The Fund held an overweight duration position throughout the month as the market has been pricing in rate hikes to a higher terminal level than we believe possible.
Market pricing now expects a cash rate of over 3.30% in 18 months time, which would be one of the fastest cash rate moves in the past 20 years. During the month, yields continued their moves higher, with 10 year bonds ending the month at 3.16%. The Fund holds a steepening curve positioning, with the majority of its duration exposure in 3 year bonds as the front-end of the bond curve is extremely steep. Overall duration and curve positioning was a key detractor for the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Apr-2022.pdfFebruary, 2022
After fees and expenses, the Fund returned -1.30% to underperform the benchmark by 9 basis points (bps). The Fund held an overweight duration position throughout the month as the market has begun pricing in rate hikes earlier than we anticipate and to a higher terminal level. During the month yields moved higher, rising to the highest levels seen since 2019. The move in Australian bonds has so far underperformed the United States, despite the fact that the Federal Reserve is positioned to start moving rates earlier than the RBA. The Fund was biased towards a flattening in longer dated maturities, however this has been reduced as the long end of the bond curve flattened. Overall duration positioning was negative for the month, however curve positioning was positive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Feb-2022-1.pdfJanuary, 2022
After fees and expenses, the Fund returned -1.07% to underperform the benchmark by 5 basis points (bps). The Fund held an overweight duration position throughout the month, which was predominately held in 3 year maturity bonds as the market has begun pricing in rate hikes earlier than we anticipate. During the month yields moved higher, approaching the highs that they reached in October. Since the Reserve Bank of Australia (RBA) has removed its Yield Curve Control policy, short dated bonds are approximately 100 basis points higher. While the RBA claims to be following a patient approach to moving rates, the market is pricing in the fastest rate hiking cycle in years. The Fund is biased towards a flattening in longer dated maturities, with an overweight in 10-15 year maturity bonds. Overall duration positioning was negative for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on Government guaranteed issuers and holds an underweight to Semi-government issuers. The Semigovernment position is short in the 5-10 year maturities, as this is where the RBA concentrated their Quantitative Easing (QE) buying and is the most prone to spreads widening. Given the improvement in the economy and hawkish tones from central banks offshore, the RBA announced that its Quantitative Easing program would end in February. We currently favour high grade spread in Supranational issuers, particularly those guaranteed by the Australian government, as historically corporates have underperformed when QE programs begin to unwind and state government bonds are relatively tight
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Jan-2022.pdfDecember, 2021
After fees and expenses, the Fund returned 0.11% to outperform the benchmark by 2 basis points (bps). The Fund held an overweight duration position throughout the month, which was predominately held in 3 year maturity bonds as the market has begun pricing in rate hikes earlier than we anticipate. During the month yields moved marginally higher, consolidating the levels that they reached in November. The volatility of the Reserve Bank of Australia (RBA) removing its Yield Curve Control policy has begun to dissipate, with the market now speculating on what they will do with the Quantitative Easing program. The Fund is biased towards a flattening in longer dated maturities, with an overweight in 10- 20 year maturity bonds, and an overweight in 3 year maturity bonds on the basis that the market appears to have priced in an overly aggressive path for the RBA. Overall duration positioning was neutral for the month.
The Fund currently favours 5-10 year supranational issuers, with a focus on Government guaranteed issuers and holds a small overweight to 10-15 year Semi-government issuers. The Semi-government position has been reduced considerably, with the Fund being short in the 0-10 year maturities, as this is where the RBA concentrated their QE buying. Given the improvement in the economy and hawkish tones from central banks offshore, the RBA is expected to reduce its Quantitative Easing over the coming months and potentially exit in February. We currently favour high grade spread in Supranational issuers, particularly those guaranteed by the Australian government, as historically corporates have underperformed when QE programs begin to unwind and state government bonds are relatively tight
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Dec-2021.pdfOctober, 2021
After fees and expenses, the Fund returned -3.59% in October, underperforming the benchmark by 3 basis points (bps). The Fund held varied duration positions throughout the month, starting with a small short position, shifting to a small long as yields sold-off and then holding a square position to end the month. During the month the Australian bond market saw extreme volatility as the Reserve Bank of Australia (RBA) decided to abandon their Yield Curve Control (YCC) target. The manner in which they exited the unconventional policy created anxiety in the market, as the RBA made no comments on the change in policy and left 3 year bond yields to their own devices. This saw 3 year bonds gap considerably higher through the end of the month, closing around 93 basis points higher. Fortunately the Fund held a neutral position in bonds out to 5 years, keeping performance close to the benchmark. The Fund is biased towards a flattening in yields in long dated maturities, with an overweight in 10-20 year maturity bonds. This was neutral for performance as long bonds moved in a similar amount to the 10 year futures, and is adding considerably carry to the Fund.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Oct-2021.pdfSeptember, 2021
After fees and expenses, the Fund returned -1.51% in September, outperforming the benchmark by 1 basis point (bp).
The Fund held mixed duration positions throughout the month, ending with a small short position as yields sold-off. During the month the economic data became mixed, as employment dropped and business conditions fell. However this reflects the worsening COVID-19 situation across New South Wales and Victoria, with expectations now being for a quick rebound once the economy reopens. Based on current vaccination rates the economy should be able to reopen from October, with the market looking towards the positive outcomes that are now expected in 2022. Bond yields sold-off aggressively over the month, which was neutral for performance as the Fund had a negligible active position. The Fund is biased towards a flattening in yields in long dated maturities, with an overweight in 10-20 year maturity bonds. This was neutral for performance as long bonds moved in a similar amount to the 10 year futures
The Australian economy has remained resilient and the recovery is ongoing. However the recent outbreaks of the highly contagious Delta strain and associated lockdowns in the most populous states are likely to put the brakes on growth in the short term. The RBA has maintained its central economic forecasts, expecting just over 4.00% GDP growth in 2022 and 2.5% over 2023. Their forecast unemployment rate continues to trend lower, with expectations it will fall to 4.25% by the end of 2022. Inflation is expected to remain subdued, with underlying inflation estimated to be 1.75% over 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Sept-2021.pdfAugust, 2021
The Australian economy has remained resilient and the recovery is ongoing. However the recent outbreaks of the highly contagious Delta strain and associated lockdowns in the most populous states are likely to put the brakes on growth. The RBA has maintained its central economic forecasts, expecting just over 4.00% GDP growth in 2022 and 2.5% over 2023. Their forecast unemployment rate continues to trend lower, with expectations it will fall to 4.25% by the end of 2022. Inflation is expected to remain subdued, with underlying inflation estimated to be 1.75% over 2022. There is growing downside risk to these expectations.
The RBA remains committed to its current policy settings and has repeatedly stated that it is not expecting to increase the cash rate until 2024. Lower interest rates continue to assist the recovery through: lower financing costs for borrowers; a lower exchange rate than otherwise; and support for asset prices and balance sheets.
The Australian economic outlook is highly dependent on how the transition to living with COVID-19 unfolds. Assuming the domestic vaccine roll-out continues to ramp up, and we meet the 70% and 80% double-dose vaccination targets set by the Federal Government for re-opening, we expect a moderate economic recovery as many lead indicators have remained positive, including: business conditions, global PMI, employment indicators, lending statistics, retail sales, house prices and commodity prices. The risk to the recovery of a stop/start economy has come to fruition thanks to the Delta variant outbreak with extended lockdowns across New South Wales and Victoria.
However the economy has shown it can bounce back strongly post lockdowns. From an external standpoint, with international borders still largely shut, the lack of international visitors and students also weighs on the outlook for the local economy, as do trade tensions with China.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Bond-Fund-Aug-2021.pdfJuly, 2021
The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) returned 1.76% over the month. The yield curve flattened as 3-year government bond yields ended the month 17 basis points (bps) lower at 0.24%, while 10-year government bond yields fell by 35 bps to 1.18%. Short-term bank bill rates were marginally lower. The 1-month rate was steady at 0.01%, the 3-month rate was 1 bp lower at
0.02%, while the 6-month rate was 2 bps lower at 0.05%. The Australian dollar was lower, closing the month at USD 0.73. Monetary policy settings remained unchanged in July, as the Reserve Bank of Australia (RBA) maintained both the cash rate and 3 year yield target at 0.10%. The RBA also indicated it will maintain its government bond purchase program, purchasing AUD 5 billion a week until early September and then AUD 4 billion a week until at least mid November.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/nabf_fund_update-3.pdfJune, 2021
After fees and expenses, the Fund returned 0.89% in June, outperforming the benchmark by 20 basis points (bps). The Fund held a neutral duration position throughout most of the month, which was neutral for performance. During the month economic data continued to be positive. Despite this inflation remains weaker than expected, with core inflation struggling to rise much above 1% year on year and wages growth has been anaemic. Over the month bond yields were mixed, with 10 year yields falling and 3 year yields rising. The Fund is biased towards a flattening in yields, with a large overweight in 10-15 year maturity bonds. This was the main contributor to performance as the long bonds outperformed shorter dated maturities substantially
0.03%, while the 6-month rate was 2 bps lower at 0.07%. The Australian dollar was lower, closing the month at USD 0.75. Monetary policy settings remained unchanged in June, as the RBA maintained both the cash rate and 3 year yield target at 0.10%. The RBA also indicated it will maintain the parameters of the government bond purchase program.
Domestic economic data releases in June were mostly upbeat. March 2021 GDP was up 1.8%, which exceeded expectations, while the annual growth rate was 1.1%. Employment rose by 115,200 positions in May, significantly exceeding market expectations. The unemployment rate fell to 5.1%, the seventh straight monthly fall and lowest rate since February 2020. The NAB Survey of Business Conditions reached another record high of 37 in May. Business confidence however fell slightly, down to 20. Retail sales rose 1.1% in April, which was in line with expectations. National CoreLogic dwelling prices saw another consecutive monthly rise in June, ending the month up 1.9%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/nabf_fund_update-2.pdfApril, 2021
After fees and expenses, the Fund returned 0.61% in April, outperforming the benchmark by 5 basis points (bps). The Fund held a slight overweight duration position throughout most of the month, which was reduced to neutral just before the release of the Australian Inflation figures. During the month economic data continued to be positive, with the unemployment rate falling to 5.6% and business conditions rising to 30 year highs. Despite this inflation remains weaker than expected, with core inflation struggling to rise much above 1% year on year. Over the month bond yields rallied, making duration positioning neutral for performance. The Fund was biased towards a flattening in yields, with an overweight in 10-15 year maturity bonds. This contributed to performance as the curve flattened.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/nabf_fund_update-1.pdfDecember, 2020
After fees and expenses, the Fund returned -0.23% in December, outperforming the benchmark by 4 basis points (bps). The Fund held a slight underweight duration position throughout the month, as a more positive narrative was beginning to form around reflation and the potential for vaccines to be rolled out in developed economies. Over the month bond yields sold off, with 10 year yields rising 13 bps and 3 year yields largely unchanged, making the duration positioning positive for performance.
The Fund was biased towards a steepening yield curve in the 3/10’s part of the curve and a flattening in yields from 10 years onwards. This was neutral for performance as the curve steepened in both 3/10’s and the longer dated maturities. The Fund continues to favour 10-15 year Semi-Government bonds, long dated Australian Government bonds, 0-3 year corporates and more recently 5-10 year Supranational issuers. This was positive for performance over the month as SemiGovernment spreads and corporate spreads where stable, with the extra running yield contributing to the Fund.
We continue to be cautious in adding additional spread risk to the portfolio, as while the market is getting some comfort around COVID-19 coming under control, credit spreads now are tight and offer little compensation for the risk of being wrong. However our rotation in credit has seen continued buying in corporate names and adding to Residential Mortgage Backed Securities (RMBS). This contributed to performance as spreads continue to contract and these issuers offer higher running yield for the Fund.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/nabf_fund_update.pdfticker: TYN0104AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.yarracm.com/tools-and-resources/literature-centre/fund-commentaries/
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
fund_features:
Nikko AM Australian Bond aims to outperform the Bloomberg AusBond Composite 0 YR Index over any three-year rolling period, before fees, expenses and taxes. The Fund is a managed investment scheme that invests in a range of predominantly investment grade Australian fixed interest securities, and cash and short-term securities.
- The Fund may also invest in international fixed interest securities up to 5% of the value of the Fund.
- Currency and international interest rate risk are hedged back to Australian dollars and Australian interest rate risk, respectively.
- Manager Address : Level 26, One International Towers Sydney, 100 Barangaroo Avenue, Barangaroo NSW 2000, Australia
- Phone : + 61 (0) 2 8072 6300
- Website : https://www.nikkoam.com.au/adviser/
- Contact Email : enquiries.au@nikkoam.com