CC JCB Global Bond A Hedged (CHN4711AU) Report & Performance

For the month ending March, the CC JCB Active Bond Fund – Class B units (the Fund) returned 3.58% (after fees), outperforming the Bloomberg AusBond Treasury (0+Yr) Index.

March 2023 is one of the months that will go down in history as one of the most volatile of all time. The MOVE Index (the bond market version of the VIX that measures daily volatility) hit levels not seen since the depths of the COVID-19 crisis of March 2020. Over a period of 13 trading days straight, the 2yr USTs traded an unprecedented 20 basis point (bp) daily range. These are not normal times! So what happened..?

The biggest event was the collapse of Silicon Valley Bank (SVB) which sent shockwaves through the financial markets. It was March 7th when US Federal Reserve, Chair Jerome Powell, noted “Nothing about the data suggests to me that we’ve tightened too much” before the Senate Banking Committee. By March 8, SVB was in trouble and raising capital, and two days later SVB was gone. This is an example of the ferocity of the financialisaton of the banking work, with deposits in the order of $42bn withdrawn in a matter of hours via online transactions, in a practice that back in the days of the GFC would have taken weeks to see people lining up once the branch opens on a given morning.

The next bank to fall was Credit Suisse, an institution with 160 years of history, and then rumours also were swirling about Deutsche Bank being in trouble, although this was driven by a CDS trade with a measly notional of just $5million. This is a minor trade in the scheme of things, but we are not living in normal times.

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).

The Fund was positioned with a mild bias to underweight duration and curve flattening positions , but then had a small draw-down in the volatility of the final week of September with the 30y point of the Australian bond curve flattening aggressively, detracting from performance. Overall, the Fund was broadly flat to benchmark returns for the month before fees.

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 March, the CC JCB Active Bond Fund – Class A units (the Fund) returned -4.16% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index. The selloff in global bond markets accelerated in the month of March to reach higher yield levels not seen since the previous U.S Fed hiking cycle of 2018.

Three core themes have continued to dominate markets:
– higher inflation in terms of both realised inflation and forward looking expectations
– increasingly hawkish Central Bank policy and;
– geopolitical risks.

Global supply chain issues, as well as pent up demand has seen inflation continue to move higher in developed markets, with the U.S Consumer Price Index data showing an annual rate of 7.9%. The U.S Federal Reserve officially kicked off their rate hiking cycle with a 25 basis point hike at the March Federal Open Market Committee (FOMC) meeting. Jamieson Coote Bonds has long been of the view that the U.S Federal Reserve have been behind the curve in their tightening cycle and had seen a 50 basis point hike as a good opportunity to send a strong message to the market of their intentions to dampen inflation. A more conservative path was chosen by the FOMC as the uncertainty reigned strong with the Russian invasion of Ukraine. Markets are now almost fully priced for 50 basis point interest rate hikes by the U.S Fed at the next meeting in May, with a terminal price of around 2.75% priced into markets, before an economic slowdown will see rate cuts in the second half of 2023. The aggressive pricing saw the U.S bond curve flatten. In the front end of the U.S bond curve, 2y United State Treasuries (UST) sell off 90 basis points for the month to finish at 2.33%, while 10y USTs sold off 51 basis points to 2.34%. Historically, curve flattening is a consistent predictor of pending recessions over the next 18-24 months.

For the month ending March, the CC JCB Active Bond Fund – Class A units (the Fund) returned -4.16% (after fees), underperforming the Bloomberg AusBond Treasury (0+Yr) Index.

The selloff in global bond markets accelerated in the month of March to reach higher yield levels not seen since the previous U.S Fed hiking cycle of 2018. Three core themes have continued to dominate markets:
– higher inflation in terms of both realised inflation and forward looking expectations
– increasingly hawkish Central Bank policy and;
– geopolitical risks.

Global supply chain issues, as well as pent up demand has seen inflation continue to move higher in developed markets, with the U.S Consumer Price Index data showing an annual rate of 7.9%. The U.S Federal Reserve officially kicked off their rate hiking cycle with a 25 basis point hike at the March Federal Open Market Committee (FOMC) meeting. Jamieson Coote Bonds has long been of the view that the U.S Federal Reserve have been behind the curve in their tightening cycle and had seen a 50 basis point hike as a good opportunity to send a strong message to the market of their intentions to dampen inflation. A more conservative path was chosen by the FOMC as the uncertainty reigned strong with the Russian invasion of Ukraine. Markets are now almost fully priced for 50 basis point interest rate hikes by the U.S Fed at the next meeting in May, with a terminal price of around 2.75% priced into markets, before an economic slowdown will see rate cuts in the second half of 2023. The aggressive pricing saw the U.S bond curve flatten. In the front end of the U.S bond curve, 2y United State Treasuries (UST) sell off 90 basis points for the month to finish at 2.33%, while 10y USTs sold off 51 basis points to 2.34%. Historically, curve flattening is a consistent predictor of pending recessions over the next 18-24 months.