JKC Asia Bond 2025 – Fixed Maturity Fund January 2025 Update:

• Both Investment Grade and High Yield Asian dollar bonds saw negative returns in December, extending 4Q24 losses
• A sharp rise in US Treasury yields, particularly at the long end of the curve was the main driver as the US Fed pared back rate cut expectations for 2025/26
• Long duration assets naturally underperformed, explaining steady outperformance from our short dated JKC Asia Bond 2025 fund.
• Political volatility in Korea dominated Asian headlines in early December although the impact on Korean bonds was ultimately limited
• Chinese authorities continue to push stimulus expectations as the country officially loosened its monetary policy stance to “moderately loose” for the first time since 2011…
• …however the persistent softness of the real estate sector continues to limit the extent of positive market reaction
• Sri Lanka successfully completed restructuring negotiations with foreign bond holders, new issues launched in mid-December raised the country’s credit rating to Caa1/CCC+ for the first time since 2022. 

Another decline in the Asian dollar bond market in December rounded off a weak 4Q for the asset class. The Asian benchmark indices ADBI (predominantly Investment Grade names) and AHBI (High Yield names) saw -1.07% and -0.18% performances respectively for the month and as a consequence both achieved negative returns for the quarter. The JKC Asia Bond 2025 (USD share class) in contrast notably outperformed the indices over this period (+0.41% for December and +0.98% for 4Q24) although the return was well below the +2.02% achieved in 3Q24. The full year net return of the portfolio was +5.45%. At +6.39% on a gross basis, the annual return of the fund was still ahead of the average implied yield at the start of the year, even taking into account the negative 0.97% impact in May when the pricing convention of the fund was changed from ask price to bid price as prescribed by its prospectus.

The overall market softness in December was mainly the result of a sharp rise in US Treasury yields during the month as rising concerns over the incoming Trump administration’s inflationary policy agenda saw the FOMC significantly scale back its interest rate forecasts for 2025 and 2026. Indeed, as demonstrated by the December release of the Fed’s “dots” chart, the median end-2025 projection for the Fed Funds target rate was increased by 50bps from 3.375% to 3.875% essentially implying just two more 25bps interest rate cuts for the whole of 2025, to be followed by another two cuts in 2026. This is a far cry from the narrative three months ago after the surprise 50bps cut in September. It shows how much the US central bank’s outlook has shifted since the market first started pricing in the inflationary implications of a Donald Trump election victory. A healthier than expected jobs market in both September and November combined with rising inflation data over the past two months have only further reinforced the Fed’s mind shift.

In December the market also saw a significant steepening of the US Treasury yield curve as the 10yr – 2yr spread jumped from zero at the start of the month to a two year high of 33bps by year end which naturally weighed more heavily on longer duration IG bonds and partly accounts for the JKC Asia bond 2025 outperformance vs the overall market.

Aside from rates, it was a surprisingly range bound month for Asian markets despite another active month for regional politics. Equity markets in Asia ended the month with mixed performance, gains or losses being relatively small in both directions.

Perhaps the biggest surprise in the region came in early December when South Korean president Yoon Suk Yeol shocked markets by unexpectedly declaring Martial Law in a move against the opposition controlled National Assembly legislature. While the order was rescinded just six hours later, the chaotic political fallout created a brief spike in volatility for what is traditionally one of Asia’s most stable bond markets. Nevertheless the lasting impact on Korean credit was limited given that most USD debt issuers have strong underlying fundamentals. All Korean positions in the JKC Asia Bond 2025 fund eventually saw positive returns over the month.

Chinese authorities meanwhile continued to try to stimulate its own markets with policies aimed at reigniting growth in the world’s second largest economy. With the prospect of increased trade barriers with the US in 2025, the PRC government announced promises of more monetary and fiscal measures, notably shifting its official monetary policy to be “moderately loose” at a central politburo meeting in mid-December. Unfortunately, as with similar announcements made over recent months, market skepticism remains high. Real estate sales data for November showing the October policy driven surge already losing momentum did not help.

China property bellwether Vanke (no portfolio exposure) saw another drop in its bonds on the back of the property sector weakness although on a single name basis, the biggest mover for the market in December was New World Development (NWD) which saw its entire bond curve drop sharply (10-30pts) after reports leaked out that the Hong Kong conglomerate was seeking some covenant renegotiation with its pool of banks. As one of the largest property companies in Hong Kong, the persistent post COVID weakness of the city’s real estate sector has put significant pressure on the company’s balance sheet. Concerns about NWD’s credit were exacerbated by recent management upheaval after two CEOs left the firm in the past three months. NWD’s not insignificant 3.1% weighting (6th largest) in the Asia HY Index was another factor driving the underperformance of overall Asian credit markets in December.

Meanwhile JKC Asia Bond 2025 fund did get a small boost from press reports of potential merger talks between Japan auto giants Honda and Nissan, with credit spreads on the financially weaker Nissan getting an understandable boost given the potential for significant balance sheet improvement within the enlarged entity. Another positive development, although not directly impacting the JKC fund, was the Sri Lankan government successfully completing restructuring negotiations with foreign bondholders last month with 98% of creditors participating in a debt swap that lifted the country out of default for the first time since 2022. Moody’s and Fitch raised Sri Lanka’s rating to Caa1 and CCC+ following the settlement of the new bonds on December 20th.

A notable feature of the JKC Asia Bond 2025’s returns in the past year has been the consistently low volatility of returns over this period which is in turn a result of the short dated and relatively low risk positioning of the fund. Although a lot of market uncertainty remains for Asian markets going into 2025, particularly with the large political change in the US, we expect the fund’s stability to remain ahead of its maturity at the end of the year.