JKC Asia Bond 2025 – Fixed Maturity Fund March 2025 Update

• A strong rally in both Investment Grade and High Yield Asian USD bond markets was fueled by lower US Treasury yields and tightening credit spreads
• Chaotic and unpredictable trade policies by the new Trump presidency weighed on US markets driving a risk off rally in US Treasury bonds
• Meanwhile the optimism of a tech fueled rebound in the Chinese equity market provided improved sentiment for the region, tightening Asian credit spreads to a 4-year low
• Market moves were broad-based although Hong Kong property bonds saw outperformance led by a rebound in New World Development bonds as fears of collapse of the conglomerate abated
• The JKC Asia Bond 2025 portfolio maintained its trend of steady consistent gains driven by low beta pull-to-par yield gains
• A small exposure of the fund to convertible bonds could provide additional gains in the event the equity market rally continues.

February saw a strong rally in Asian USD bond markets as a sharp decline in US Treasury bond yields at month end underpinned price gains for long duration assets. Meanwhile a jump in Chinese equity markets similarly supported Asian credit spreads helping to fuel a rebound in the Asian High Yield (HY) segment. The Investment Grade (IG) heavy benchmark Asian Dollar Bond Index (ADBI) gained +1.81% in February while the high yield AHBI Index jumped +2.23% over the same period, both recovering losses in the previous four months. The JKC Asia Bond 2025 fund advanced +0.51% in February, understandably lagging the overall market on account of the fund’s low beta/duration positioning but still maintaining the stable positive trend seen consistently for the past 12 months.

US politics continued to dominate the headlines in February as the recently installed Trump administration completed its first full month in office setting a tone of aggressive and volatile trade rhetoric with brinkmanship tactics employed against some of its largest trading partners. As expected, China was one of the core targets with a 10% new tariff on Chinese imports imposed from February 1st and another 10% proposed to take effect on March 4th. Meanwhile tariffs on other major trading partners including Canada, Mexico and the EU have been threatened albeit with deadlines that continued to shift in unpredictable fashion. Naturally this chaotic backdrop weighed on US equity markets with both the S&P and NASDAQ seeing a meaningful correction at the month- end creating an overall risk-off tone to US market sentiment.

Even US inflation data coming in above expectations did little to affect the defensive shift of the market positioning back into US Treasuries as yield on the 2-year and 10-year bonds fell by -21bp and -33bps respectively in February, to their lowest levels since early December last year. Although concerns remain that Trump’s trade policies will ultimately be inflationary, this is becoming increasingly offset by fears regarding falling growth in the domestic US economy as erratic domestic policy making hurts business sentiment. In the coming few months there will also be a considerable focus on the US labour market as job expectations have weakened following the aggressive cuts to the federal government workforce imposed by the newly installed DOGE unit under tech billionaire Elon Musk.

In stark contrast to the US, China markets (in particular Chinese stocks listed offshore in Hong Kong) had an extremely strong February as the positive halo effect of last month’s AI breakthrough announcement by previously little-known tech start up Deepseek fueled optimism of a renaissance in the Chinese tech sector. Fueling the market’s excitement was a much-publicized meeting between President Xi and CEO’s of several of the country’s leading technology giants which sparked optimism of a long awaited rerating for the sector which has been dogged by negative policy uncertainty in recent years. The tech rally quickly spread across all sectors with offshore H-shares significantly outperforming onshore A-share markets, although the impact on Asia credit was limited given the fact that technology companies in the USD bond market already trade at relatively expensive valuations. Nevertheless, Asian IG credit spreads still tightened on improved optimism with the iTraxx Asia CDS index hitting its tightest level since early 2021.

Naturally the combination of lower USD treasury yields and tighter Asia credit supported strong gains across Asian dollar bond markets with long duration outperforming short duration and HY outperforming IG. For high yield markets in particular there was a strong rebound in recent high beta laggards. Notably the Hong Kong property names rallied, led by New World Development (NWD) which recovered sharply from its January losses, the curve gaining 15-25pts as the company made progress on asset sales. This helped also boost sentiment for other Hong Kong developers, and even for some selected (unstressed) China real estate bond issuers which led the market gains in February. Away from these specific sectors, Asian markets saw generally an even performance across all segments.

The JKC Asia Bond 2025 saw its +0.51% gain in February predominantly driven by pull-to-par and accrual returns as the short duration of positions in the fund gives little scope of ‘extraordinary’ returns in a falling interest rate environment. That said, the fund does have a small exposure to convertible bonds and saw two of these positions (XROAU and WUXAPP) post strong gains on the back of rallies in the underlying equities which does provide some scope for additional alpha generation if the current equity market rebound continues.