JKC Asia Bond 2025 – Fixed Maturity Fund September 2024 Update:

• Extremely volatile equity markets after BOJ rate hike drove the unwinding of carry trades; Taiwan and Korea markets swung wildly in early August
• Asian dollar bonds (both Investment Grade and High Yield) with limited leveraged investor exposure maintained good stability amongst the market noise
• Fed’s Powell gave clearest indication yet of a September lift-off for US rate cuts
• Weakening jobs data and improving inflation in the US supports this outlook
• Chinese USD bonds underperformed the rest of the Asian region as economic recovery continues to disappoint on the back of soft property demand
• JKC Asia Bond 2025 maintains steady gains in August as low beta / short duration positioning insulates portfolio from market volatility

A significant pick up in volatility for global risk assets in early August did little to impact the ongoing rally in Asian credit markets which posted another month of stable returns, driven by lower US Treasury yields and unchanged credit spreads. The stable, almost benign, performance of Asian bonds was in stark contrast to the wild swings seen in some other global asset classes after the BOJ’s shock decision to hike Japanese interest rates on the final day of July, sending global equity markets into a temporary tailspin. Although Japanese rate hikes had been expected for many months, the timing still caught many investors off guard with the resulting jump in the JPY causing multiple stop losses and an unwinding of popular carry trade positions across the globe. Within Asia the hardest hit markets were tech heavy Korean and Taiwanese equities, although the whole region had a challenging first week before staging a recovery later in the month.

The impact for Asian credit, and high yield in particular, was significantly less pronounced as leveraged investor exposure to the asset class has reduced significantly since the start of the China property crisis. Instead, the main driver for Asian dollar bonds remains centred on US monetary policy. In this regard, a combination of weak jobs data in the US (unemployment rate hitting a post COVID high of 3.4%) and lower than expected CPI for July further raised prospects of upcoming rate cuts by the Fed, especially after the central bank decided to keep rates steady at its August 1st meeting.  Expectations of a “Fed lift off” in September have been building for several months on the back of softening data and careful messaging by FOMC members, as well as Jerome Powell’s mid-month Jackson Hole speech stating “the time has come for policy to adjust”. With a September cut therefore all but assured, market speculation has now shifted to whether 2024 will ultimately see 3 cuts or 4 cuts with futures markets currently pricing somewhere between these two possibilities.

US Treasury bond yields continued trending lower as they reflected this outlook for the Fed rates, with the 2-year and 10-year bonds yields ending the month at 3.92% (-32bps) and 3.90% (-12bps) respectively. The significant outperformance of the short end of the curve drove the 10yr-2yr spread to its tightest level (-2bps) since mid-2022. Nevertheless, despite the underperformance of the long end of the curve, long duration investment grade bonds continued to outperform shorter duration high yield on a cash price basis as credit spreads continued to be range bound during the month.

Within the high yield market in August, the gains were well spread and reasonably uniform across all sectors with only China underperforming, dragged down by its property, commodity and retail sectors. Despite aggressive measures to stimulate the moribund real estate sector in China, end buyers of flats remain sidelined with CRIC reporting another -27% YoY drop in property sales for the country’s top 100 developers in August. During the month, reports emerged that several city governments had moved to allow developers greater flexibility in pricing new project launches. Understandably, such a move raises concerns of more aggressive downward price momentum for the primary market in the short term which will inevitably hurt near term demand. However, ultimately these moves should help bring stability to the sector as a clearing price is finally discovered. Meanwhile weak 1H24 results from some of the last surviving “non defaulted” developers kept investor sentiment depressed with VNKRLE 27’s (a bellwether for the sector) seeing its bonds down 4-5 points in the month.

Counterpoising the weakness in China, south Asian markets continued to outperform in August, no doubt supported by a 2.3% drop in the USD (as measured by the dollar index) during the month. In fact, the Indonesia JCI Equity Index hit a new record high in August and the JKC Asian Bond 2025 portfolio benefitted from it with Indonesia remaining the largest overweight for the portfolio, albeit gains remained limited given the low beta nature of the short duration fund. The fund (USD share class) ended the month with a gain of +0.44%.

Going into September clearly the anticipation of an inflection point in US monetary policy will be the focus for Asian dollar markets although we also expect plenty of political noise as the US presidential race ratchets up in the next few months. Nevertheless, the low beta nature of the short duration portfolio should see limited price impact from these external macro forces. We expect stable accruals will continue to dominate returns for the fund.