CC JCB Active Bond (CHN0005AU) Report & Performance

For the month ending May, the CC JCB Active Bond Fund – Class A units (the Fund) returned -1.27% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index.

Overall the month of May saw global yields drift higher in yield across developed markets as markets took out pricing of rate cuts that had appeared in 2024 money market curves as a lingering outcome of the banking worries of March. Central bankers globally pushed back on this pricing. Outside of central banks and data, the other key catalyst driving headlines in markets was the pending debt ceiling negotiations, with parties finding enough common ground to send the deal to the Senate by the final week of the month. The US 10y yield finished the month 20 basis points (bp) higher at 3.65%, and the Australian 10year bond was 30 bp higher to 3.59%.

Central banks continued to tighten policy with the Reserve Bank of Australia (RBA) surprising the market with a 25bp hike to 3.85%, whilst the Reserve Bank of New Zealand, European Central Bank and Bank Of England all delivered 25bp rate hikes as expected lifting rates to 5.5%, 3.25% and 4.5% respectively. The RBA had been expected to pause at the May meeting, however the 7% yoy CPI print for Q1 and a 3.5% unemployment rate was too compelling for the RBA to sit on their hands, especially on the back of the RBA Review findings, and the desire to maintain credibility and prevent inflation expectations from spiraling higher.

The portfolio overall traded a short bias on the month, as JCB believed the market was pricing in too much easing in the face of sticky inflation. Price momentum towards higher yields added to our bearish sentiment, however JCB turned long at 3.75%. JCB believe that entry levels of between 3.75-4% are very attractive medium term levels to be adding to long duration positions ahead of the northern hemisphere summer where bonds seasonally have seen strong performance historically.

For the month ending January, the CC JCB Active Bond Fund – Class A units (the Fund) returned 2.89% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.

Global bond markets rallied strongly in the month of January, retracing the moves of late December following the BoJs surprise increase to the YCC target band and then further sell-off to bonds in the low liquidity period between Christmas and the new year. These enhanced yields to begin the year attracted significant interest into the fixed income asset class which saw a strong rally of around 3% for the index. Further drivers of the positive return of the bond market was the softer hard data points in the US, including weaker than expected US ISM Services and the US CPI coming in at 6.5% yoy. The market consensus that we have seen the highs in US inflation. The US wages number also came out under market expectation which gave further confidence to bond bulls.

The January Bank of Japan meeting was highly anticipated following the big moves in December, however this turned to be markedly dovish with no further changes to the YCC target, and continued suppression of yields followed.

Reports from Europe that the ECB would only consider a 25 bp hike in March along with a lower than expected Eurozone CPI print provided support for the bond market there. The peripheral European markets and the Australian bond markets in particular enjoyed a tail wind from that BoJ decision as the threat of repatriation flows diminished.

The Canadian Central Bank started the year with a 25 bp hike to 4.50% however was the first Central Bank to offer guidance of a step down from tighter monetary policy as they signaled a shift to a “conditional pause”. Locally, Australian bond movements generally outperformed US Treasury yields up until the final week where the quarterly inflation data was released, showing a headline rate of 7.8% yoy. This was a shock to the market and resulted in heavy selling of ACGBs ahead of the first RBA meeting for 2023 in February.

The CC JCB Active Bond Fund began the month with a long bias accreting some positive alpha over the index before moving to underweight duration ahead of the Bank of Japan meeting, as we saw balance of risks to higher rates as the BoJ would further tighten their monetary policy. This was not to be and the was detractive to the performance of the portfolio, however this was risk managed as per our process and we recouped some gains having an underweight duration position into the Australian CPI data, noting that markets were stretched to the lower side with respect to yields. We hold overweight positions in short end semi governments and supranationals , and added to our green and sustainable linked bond holdings over the month.

For the month ending December, the CC JCB Active Bond Fund – Class A units (the Fund) returned -2.37% (after fees), performing in line with the Bloomberg AusBond Treasury (0+Yr) Index.

The main thematics in the month from a forward looking macro-economic perspective into 2023 focused on the opening up of China from Covid-19 restrictions, a pivot from the Bank of Japan (BOJ) monetary policy, continued hawkish viewpoints from the European Central Bank (ECB) and validation of peak global inflation. Despite the lower than expected November US CPI print mid-month which came in at only 0.1% and was the second consecutive downside miss, the bond market could not sustain the rally into year end. Bond markets were caught off guard from the hawish rhetoric at the ECB meeting on 15th December which came on top of the as expected 50 basis point (bp) rate hike – with President Lagarde suggesting that “a significant rise at a steady pace means that we should expect to raise interest rates at a 50 bp pace for a period of time” . The BoJ also sprung a hawkish surprise into Christmas as they modified their long held Yield Curve Control policy as they widened the range by 25 bps with a maximum yield on 10yr Japanese bonds increased to 0.5%. This saw Japanese yields jump by over 20bp and the Yen rallied by almost 4% on the day. The final blow for bond markets into year end was the announcement from Chinese authorities that all Covid-19 quarantine measures would be removed from 8 January ramping up expectations of a pick up in demand and growth through the global economy in 2023. The heavy bond supply calendar in January also resulted in front loaded selling into diminished holiday market liquidity that exacerbated the global bond market weakness for the month. Australian rates market underperformed sharply into year end with low liquidity evident as corporate deal related selling, hedge fund futures selling and semi -government supply, were all micro factors that augmented the bearish sentiment from the BoJ hawish move and the eagerly awaited reopening of China. The fear that the higher yields emanating from Japan as a result of their tilt to monetary policy hit Australian bonds the hardest in expectation of Japanese investors reducing their foreign bond exposures. Looking forward the portfolio will look to tactictally explore the ranges as the anticipated slowdown in global growth from the rapid increase in financing costs is balanced against the Central Banks assessing their 2022 mandate to slay the inflation dragon and the implications of the re-opening of the Chinese economy .

For the month ending September, the CC JCB Active Bond Fund – Class A units (the Fund) returned -1.46% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.

Hawkish central banks. Higher than expected inflation and other upside data surprises. These two headlines could have led most of the monthly commentaries for 2022, however what was added to the month of September was a UK ‘mini-budget’ which contained fiscal easing measures that led to an unprecedented sell off in UK Gilts in the manner of a VAR shock, taking global rates for the ride, finishing the month significantly higher in yield.

As the inflation genie continues to surprise to the upside, central banks continued to raise their respective cash rates. In September, these included hikes from: FOMC (+75bps) RBA (+50bps), Riksbank (+100bps), BoC (+50bps), SNB (+75bp), Norges Bank (+50bp), and BoE (+50bp).

The UK mini-budget was nothing short of a disastrous piece of policy as the Truss government announced measures to ease fiscal conditions with proposed tax cuts and significantly larger borrowing programs for the UK . This saw a Gilt led sell-off, taking global fixed income yields higher, before the Bank of England needed to step in and buy Gilts to “restore orderly market conditions”, effectively emergency QE.

Overall bond volatility continued in September, with the US 10y Treasury trading an 85bp range (3.17% to 4.02%, closing the month 64bp higher. The MOVE Index (a measure of bond volatility) was seen to reach a high of 159, which is only just below the record of 164 seen in 2020. Australian bonds outperformed comparatively, closing the month 31 basis points higher. The key driver of the outperformance was the improved budget measures announced by Treasurer Jim Chalmers, as well as an RBA that hinted most of the hard lifting had been done by the RBA in the current rate hiking cycle, and the speed of the hikes was to slow. The higher bond yields and hawkish central banks continued to weigh on risk assets, with fears of recession becoming common place, and seemingly the narrative in markets is now that good news (i.e. better data) is bad news (Central banks need to do more and risk markets will continue to be hit).

For the month ending June, the CC JCB Active Bond Fund – Class A units (the Fund) returned -1.39% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.

Central Banks were out in force tightening monetary policy in the month of June as the US Federal Reserve delivered a 75 basis point hike and the Reserve Bank of Australia lifted the cash rate by 50 basis points. The hawkish tone triggered an aggressive sell-off in rates which led to extended losses in risk markets, and saw US equity markets enter bear market territory, led by the NASDAQ (proxy for growth assets) which sold off 8.7% in the month of June to be down close to 30% since the turn of the year.

The first half of 2022 has been very difficult for bond markets with the worst returns for sovereign bond funds going back decades, let alone funds that have credit exposure added to their sovereign holdings. Green shoots are appearing for bond holders now, with the asset class now beginning to exhibit the diversifying characteristics to listed risky asset markets that we have come to expect over time. In fact, while bond markets were the first asset class to see substantial losses this year, since their lows on June 22nd, we have seen a positive return, whilst equities have continued their slide

Going forward, JCB believes bond markets could continue to provide solid returns over the rest of the year as recessionary fears appear certain to increase and then very likely be crystalised in the next 6 months or so. A global recession is now expected as the base case outcome with demand destruction and weakening momentum widely evident in many leading data releases. JCB also believes it is likely that the US economy has already entered a technical recession, as the widely followed Atlanta Federal Reserve GDP nowcast model suggests that current Q2 GDP is -2.1% as at the end of June, following on from a -1.5% in Q1.

For the month ending April, the CC JCB Active Bond Fund – Class A units (the Fund) returned -1.45% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index. April 2022 was the month that the Reserve Bank of Australia (RBA) lost its “patience” stand and took the steps to begin normalisation of monetary policy.

Cross asset volatility picked up in the month globally, with equities, credit and fixed income all seeing negative returns for the month as global inflation continued to accelerate and central banks are set to continue to tighten policy, targeting inflation and destroying demand with the blinkers on as asset prices took a heavy hit. US inflation data showed a new cycle high of 8.5% year on year, however the consensus is that we have now seen peak inflation and we should start to roll over from now onwards.

US Fed speakers started toying with the idea of aggressive rate hikes, with the potential for 75 basis point (bp) hikes, however it became market consensus that the preferred path would be for 50bp hikes to get the Fed back to a more neutral rate of funds that was no longer stimulatory. Locally, the highly anticipated Australian CPI figures were released in the final week of April which showed that inflation was running at uncomfortably high levels (5.1% year on year vs the RBA target band of 2-3%), much like the rest of the world, and putting the RBA in line for multiple rate hikes over the rest of 2022. JCB sees the cash rate reaching 1.5% by year end.