November, 2021
Another volatile month for bond markets as investors worked though changing central bank commentaries, economic data and the appearance of the new COVID-19 variant "Omicron". Locally, three-year bonds traded in a range of 0.99% to 1.33% before finishing at 1.01%, 0.39% lower over the month. 10-year bonds closed at 1.70%, 0.415% lower, after trading between 1.66% and 2.02%. Australian rates outperformed US markets with US 10- years only closing 0.10% lower at 1.45%. The Fund maintained a long duration position over November, however the large deterioration in the swap and credit spreads swamped the overall Fund performance. At the end of the month the Fund duration was 3.57 years.
After much speculation in the second half of October, the RBA confirmed the end of its Yield Curve Control (YCC) program at its November meeting. This was the next step in the normalization of monetary policy which began with the ending of the Term Fund Facility (TFF) on June 30. The RBA however remained resolute that interest rates would not be increased before late 2023, in stark contrast to market pricing which had close to four tightening's priced before the end of December 2022. This disconnect between the RBA view and the market is adding to the increased volatility experienced over the past six weeks
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-9.pdfOctober, 2021
Bond markets experienced one of the most significant selloffs in recent memory. Locally, most of the damage occurred in the 3 and 5-years part of the curve with rates lifting by 0.90%, and 3-year yields finishing at 1.40%. Overnight indexed swaps moved rapidly to price a tightening of cash rates with the market pricing the first tightening for April 2022, some two years ahead of RBA guidance. Further to this the market had priced four tightening's of cash rates by the end of 2022. The long end of the curve was not immune to these moves with the 10-year rate rising 0.61% to finish at 2.115%. We entered the month with a short duration exposure and gradually reduced this position throughout the month. With the aggressive pricing of rate hikes in the final week we added front end duration, finishing the month at 3.70 years. Inflation was the talking point of markets during October. In the US, monthly data added to the story that inflation may not be transitory. Rising business activity and new orders rose while supply chain pressures remained high.
Headline inflation and retail sale printed on the higher side of expectations. Markets responded by pushing 10-year US breakeven inflation levels to a record high of 2.70%. Locally, inflation surprised on the high side with the trimmed mean CPI, the RBA's preferred measure, printing at 0.70% for Q32021 leading to an annual rate of 2.10%. This was the first time in several years' inflation had moved into the RBA target band. The release drove front end rates higher and had many in the market questioning whether the RBA would stand by its Yield Curve Control strategy, with the April 2024 bond moving from 0.175%, RBA target rate of 0.10%, to over 0.70%. By October 28 the yield curve had flattened 0.50% over the month, a move only exceeded in June 2009.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-8.pdfSeptember, 2021
Local bond markets started to look past the uncertainty of lockdown in September as vaccination numbers grew and markets began factoring in a more optimist outlook. This was particularly the case in the final week as 10 year bonds rose 0.22% to finish at 1.49%; 0.33% higher over the month. The move higher was sparked by a more hawkish tilt to the US Federal Reserve's Federal Open Market Committee (FOMC) statement and Chairman Powell's press conference, resulting in US 10 year rates pushing 0.18% in the final week to finish at 1.49%.
The Fund held a short interest rate position to benchmark over the month, driving the strong outperformance, with duration largely unchanged at 1.45 years. As expected, the US Federal Reserve confirmed that a November taper announcement was likely, but it was the somewhat quicker timeline of the QE taper reduction, concluding around the middle of 2022 that surprised the market. A quicker timeline opened up the optionality for rate hikes by the end of 2022 should the conditions warrant. The other driver of the markets hawkish interpretation of the statement was that inflation was expected to remain elevated for a longer period, with Chairman Powell noting that "more persistent than expected bottlenecks relative to their forecast update in June". The combination of these three factors saw rates push higher, indirectly impacting local interest rate markets
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-2-1.pdfAugust, 2021
Locally, interest rate markets were largely unchanged over August with the lockdowns of NSW and VIC having a dampening effect on market sentiment and rendering most economic data obsolete. The Australian 10-year bond traded in a range of 1.05% to 1.24%, finishing the month at 1.14%, 3 basis points below the opening yield. While 3-year bonds ended the month 3 basis points lower at 0.26%. Portfolio duration was reduced to 1.84 years during the last week of August as we became more convinced interest rates would drift higher into year end.
The RBA surprised many at its August meeting by leaving its planned September QE plans unchanged. As COVID-19 numbers grew and it became more evident lockdowns would be extended, many expected the RBA to delay the announced bond purchase reduction, instead the RBA remained upbeat about the domestic outlook, expecting it to grow strongly again in 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-7.pdfJuly, 2021
Bonds rallied from the beginning of July, with the increasing spread of the Delta variant weighing heavily on global sentiment. Domestic yields outperformed movements in the US with the 10- year falling 0.36% to finish the month at 1.175% while the US 10- year fell 0.25% to 1.22%. After starting the month with 1.88 years, the short duration was neutralized early in the month to finish at 3.10 years.
The lockdowns in Australia drove the outperformance of the domestic market and had many market participants speculating whether the RBA would delay the taper of the QE program that was announced at their July meeting. This speculation saw 3-year yields drop 0.17% to 0.24%. As the Sydney lockdown continued through the month strong domestic data was largely ignored as little of it reflects activity in Sydney after the lockdown.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-6.pdfJune, 2021
The key themes over June were the significant flattening of both the domestic and US curves and the reduced fear of markets concerns about inflation risk. The domestic curve started the month at 1.43% and fell to 1.07%. Three year rates rose 0.25% to 0.465% following a significant change in the markets expectations that the Reserve Bank will commence tightening rates as early as 2022 while 10-year rates fell 0.11% to 1.47%, driven by reduced inflationary fears in both the US and domestic economy. The flattening of the curve was a key driver for the Fund's underperformance with our expectations that inflationary pressures will grow with improved economic data and employment numbers. At the end of the month the Fund maintained its short duration position of 1.91 years.
US inflation data and expectations continued to surprise on the upside but was offset by a poor employment report. While inflation data was high, markets become more comfortable with the Fed's view that inflationary pressures were only transitory. The US Federal Open Market Committee (FOMC) surprised markets with the Fed dots implying two rate hikes in 2023 while inflation forecasts were only 2.20%, well under market expectations. Immediately post this meeting, long end rates pushed lower while short rates rose
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-4.pdfApril, 2021
After a volatile first quarter for global interest rate markets, yields spent April range bound. Domestic 10-year bonds started April at 1.80% before finishing the month at 1.70% while US 10-year rates ended the month at 1.63%, falling 0.11%. The small rally in yields globally largely reflected a level of fatigue following the strong rise in yields since late 2020 and a market that is well priced for the current strong rebound in US data. The Fund's duration was largely unchanged over the month after starting at 4.19 years before finishing the month at 4.06 years.
Domestically economic data was mixed with business and consumer confidence rebounding strongly as the economy continued to open. The unemployment rate fell to 5.6% from 5.8% with a solid jobs improvement of 70,000 new jobs created.
However, inflation printed well below expectations at 0.6% for the first quarter of 2021, leading to just 1.1% over the year, well below the RBA's 2-3% target. The US data prints reflected the strong rebound currently occurring. The high levels of fiscal spending, solid vaccine uptake and the reopening of the economy has seen consumer confidence grow strongly, which has supported retail spending and housing. Like Australia, job growth in the US was strong, with the creation of 915,000 new jobs in March
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update-3.pdfDecember, 2020
Front end yields remained unchanged over December with 3-year bonds closing the year at 0.10%. Ten-year yields moved higher, finishing 7 basis points higher 0.97%. While COVID-19 infection numbers weighed heavily on global growth expectations on the rollout of the vaccine, an additional US stimulus package and positive domestic data all placed upward pressure on long dated yields. Over December the fund returned -0.24% while over 12 months it returned 2.37%. As expected, the RBA's December board meeting was uneventful. The statement suggested the Bank remains open to further quantitative easing (QE) while negative rates and further Yield Curve Control seem unlikely.
The RBA made it clear that their balance sheet wouldn't drift too far from global peer action, meaning any further global QE action could result in further domestic QE. The December RBA board minutes contained few surprises. Of note was the boards comment that they would closely monitor the effect of the QE program on the economy and the functioning of the market and were prepared to do more if required and the size of the QE program remains "under review". The Australian government released its mid-year budget update. Australia's deficit for FY2021 was revised lower to $197bn from $214bn. The improvement is owed mostly to the JobKeeper program, with strong economic growth and fewer recipients. On the economic front, Q3 GDP came in on the stronger side with a quarter on quarter jump of 3.3%.
With Victoria coming out of lockdown during this period it leaves more pickup ahead in the coming quarters. November employment was strong at 90k, well above expectation. Victoria again drove much of the improvement. Finally, unsurprisingly retail sales jumped a remarkable 7% month on month, again reflecting Victoria. Excluding Victoria, the number was still a solid 2.7% gain. Turning to the offshore markets, US ten-year bonds moved higher finishing the year at 0.92% from 0.84%. The US Federal reserve (Fed) did little to change its monetary policy stance in December.
The most notable development was how they described the outlook for their asset purchase program. Noting they would continue until there had been "substantial further progress" on the inflation and employment front. Congress also passed a $900bn stimulus package which the market expected, and the UK finally struck a Brexit deal with Europe. December was a mixed month for local credit markets with strong support for high yielding BBB rated corporates and widening pressure on local bank spreads. The strong theme from previous months continued with investors searching for yielding product, driving BBB spreads 7 basis points tighter to finish the year at 1.07%. While three- and five-year domestic bank paper struggled to hold onto recent lows, with spreads widening 3 basis points respectively to 0.20% and 0.36%. Issuance was extremely light in December with only three notable transactions. Goodman Industrial Partnership issued an 8-year bond at credit margin of 1.15%. Like the majority of transaction in the second half of 2020 the deal was well oversubscribed and priced 15 basis points tighter than the announced price. Macquarie Bank issued a five-year bond at a margin of 0.48%. Finally, SHML launched its first RMBS transaction for 2020. As a premium issuer, interest was extremely high with the transaction 3.5 times oversubscribed. The fund participated in the Macquarie and SMHL transactions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/fund-update.pdfticker: WFS0486AU
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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:
Altius Bond aims to optimize returns in all economic cycles—delivering investors solid income generation coupled with low capital volatility. The fund has broad investment guidelines permitting investments in fixed interest securities of 0-100% and cash and similar investments of 0-100%.
- High conviction approach, focused on delivering absolute returns throughout an economic cycle.
- Diversified portfolio of government and credit securities, with the potential to generate regular income paid quarterly.
- Flexible duration mandate ranging from cash to long bonds investing only in domestic assets, thus avoiding importation of global risks (e.g. currency), and
- Focus on managing downside exposure to interest rate, credit and liquidity risk.
- Manager Address : Suite 3, Level 13 88 Phillip Street Sydney NSW, Australia 2000
- Phone : 1300 997 774
- Website : https://www.altiusam.com/
- Contact Email : australianunitywealth@unitregistry.com.au
- Contact Page : https://www.altiusam.com/contact-us