JKC Asia Bond 2025 – Fixed Maturity Fund November 2024 Update

• October saw a sharp fall in US Treasury bonds driven by stronger than expected jobs data
• Market positioning ahead of the US presidential election also clearly fueled a rise in US Treasury yields and a corresponding rise in the US dollar
• China equity markets were unable to sustain the September rally as details of fiscal stimulus from PRC authorities remained elusive
• China property bonds was one bright spot in the Asian High Yield market as green shoots of a recovery was seen in tier one cities
• JKC Asia Bond 2025 returned 0.54% in October, outperforming the ADBI as the short duration protected the fund from UST moves
• We expect further market volatility in early November driven mostly by the US election and the November National People’s Congress meeting in China

A five-month rally in Asian dollar bonds ended abruptly in October as stronger than expected US macro data combined with a shift in general market positioning going into the US presidential election triggered a sharp selloff in US Treasury bonds. Meanwhile the market euphoria over the economic stimulus in China fizzled out as announcements over the highly anticipated package of fiscal measures from the Central government disappointed both in terms of delayed timing and lack of details. Indeed, although concrete numbers regarding the Chinese authorities’ plan to use the government’s balance sheet to rekindle the weakening economy have yet to be released, the market appears to be already positioning for disappointment. At the very least it is increasingly apparent that the pace of the frenzied equity rally of late September was both premature and unsustainable. Both H- and A- shares ended September with losses for the month and although Asian credit spreads remained largely stable, the sharp move higher in US treasury yields drove a -1.31% decline in the Asian dollar bond index (ADBI) for the month.

The selloff in the US Treasury market was in stark contrast to market expectations at the start of the month. September saw the Federal Reserve surprise economists with a larger than expected 50bps rate cut driving speculation the US Central bank would front load monetary easing to head off the quickly weakening US jobs market. However, jobs data released on October 4th reversed that view as both the Non-Farm Payroll (254k) and the unemployment rate (4.1%) came in better than forecast. Even mixed inflation data for September (a Consumer Price Index above expectations and a Producer Price Index below expectations) did not change the market narrative which became increasingly focused on the US election and on rising expectations of Donald Trump winning back the presidency, as reflected in narrowing polls and a jump in betting markets. Although the betting markets are easily manipulated and most polls continue to point to a “coin toss” in the key swing states that will decide the election, the move higher in US Treasury yields was still ascribed to rising expectations of a Republican presidential win and potentially a clean sweep of both the House of Representatives and the Senate. While neither candidate shows much appetite for fiscal discipline, Trump’s plan for tax cuts, deregulation and increased deficit spending is seen as especially negative for USD bonds.

Consequently, the 2-year and 10-year US Treasury yields rose by 53bps and 51bps respectively over the course of October and implied interest rate cuts for the remainder of 2024 declined from 71bps (i.e. 3 cuts) at the start of the month to 42bps (either 1 or 2 cuts) by month-end. Given the parallel shift in the Treasury yield curve and broadly flat credit spreads, this had a greater negative impact on long duration assets. It naturally caused the Investment Grade-dominated ADBI Index to significantly underperform the Asia High Yield AHBI index which has a shorter average duration and which benefits from a higher offsetting carry.

Meanwhile, in Asia, the focus was much more directed at China and at the coordinated monetary and fiscal stimulus plan announced in mid-September. While many of the monetary measures including cuts to the bank reserve ratios (RRR), to the 1-year and 5-year loan prime rates, to the medium term lending facilities and to the key 7-day reverse repo rate as well as cuts to general mortgage rates across the country have already begun in earnest, fiscal policy measures continue to be bogged down in debate. So far, the Ministry of Finance has already signaled that initial fiscal stimulus will likely come in the form of bank recapitalisations and a potential major debt swap of local government financing. The scale and timing of these measures, which are likely to be funded by an issuance of temporary special bond quotas to be subscribed by the banks, is yet to be disclosed. Also uncertain is the extent to which these measures will provide incremental stimulus to the economy rather than plugging hitherto unreported holes in existing public finances.

In early November a meeting of the Standing Committee of the National People’s Congress (NPC) is expected to approve the fiscal stimulus package which could potentially unveil more details of the plan although there remains the danger of lofty market expectations being unfulfilled which could cause some near term pressure on markets. That said we do believe the Chinese authorities are now highly committed to supporting the weak economy of China which has continued to fall below the government’s full year’s GDP target of 5%.

One sector which has admittedly started to show green shoots of recovery is real estate with cities such as Shenzhen, Shanghai and Beijing reporting a strong pick up in property sales volumes in October. Of course, a rebound in Tier 1 cities is unlikely to be immediately replicated across the whole of China, however it is an early sign of some positive consumer reaction to the government’s efforts to reinstate confidence in the embattled real estate sector. As a consequence, China property bonds, although only a small weighting in the HY market today, were a strong driver of returns for the asset class performance for the month.

In October the JKC Asia Bond 2025 portfolio returned 0.54%. China, and more specifically Chinese property bonds, returned 1.25% and 7.34% respectively, making a strong impact on the fund’s performance for the month. Indeed, China real estate bonds only account for a weighting of 2.9% of the fund but contributed 20bps towards the total 54bps portfolio gain. Notwithstanding the sector rebound, one name in particular (GLPSP 2025) outperformed after the company announced a USD5bn asset sale which significantly reduced refunding risks for the 2025 bond. The portfolio also enjoyed a rare uptick from distressed property names which saw a small gain on anticipation of a recovery for the sector. While we are less sanguine about the prospects for defaulted China property issuers, to which the fund has an exposure smaller than 1%, we welcome the recent buying interest as a potential exit opportunity for these names. Returns across the rest of the portfolio’s sectors and geographies were relatively consistent and steady as losses due to the jump in underlying Treasury yields and some overhang from a related rebound in the USD was more than offset by accrued interests.

Going into November we expect further market volatility as the first week of the month sees crucial jobs data in the US, interest rates decisions from both the US Federal Reserve and the Bank of England and of course the US presidential election which although scheduled for November 5th may not see a clear winner emerge for several days after the count. Finally, we hope the National People’s Congress can bring some clarity to China’s fiscal policy although actual outcomes from this key meeting may also not be released until sometime after the event. Nevertheless, our defensive and low beta positioning should continue to protect the fund from any large market swings. 

MONTHLY PERFORMANCE