JKC Asia Bond 2025 – Fixed Maturity Fund September 2025 Update

• A surprise weak jobs report at the start of August set the tone for the market driving a sharp drop in short-dated US Treasury yields and gains in Asian dollar bonds.
• Although calls for Fed rate cuts continue to grow, the gains in US Treasury bonds were concentrated at the short end of the curve.
• Long duration US Treasury bonds in contrast continued to sell off on account of long term economic/inflation uncertainty…
• …as a consequence the US yield curve ended August at its steepest level (30yr – 2yr spread) since 2021.
• Concerns over political interference in US economic data increased after Trump fired the head of the US Bureau of Labour Statistics (BLS) following a jobs data revision.
• Asian dollar bonds had a strong month, mostly driven by the falling US Treasury yields.
• Despite a rally in Chinese equities in August it was actually the HK property and Indonesia/Thailand oil sectors that led the market advance. 
• JKC Asia Bond 2025 saw a 0.31% gain in the month reflecting the average yield of the short-dated positions in the fund.

Benign market conditions mixed with relatively quiet “summertime” market activity helped Asia credit markets extend their gains in August with both the Investment Grade (IG) and High Yield (HY) Indices generating consistent positive returns throughout the month. The benchmark IG heavy ADBI index climbed 1.28% while the equivalent HY index advanced by a similarly impressive 1.46%. The JKC portfolio which does not benefit from duration driven beta still gained +0.31% taking the year-to-date performance to 2.52%, in line with the average yield to maturity of portfolio constituents which all have a maturity of less than 6 months.

It was a mixed month for US Treasury bonds as yields dropped sharply at the short end of the curve, but this performance was not matched at the long end. Indeed, at the extremes the 2yr bond yield fell by 34bps while the 30yr yield actually climbed by 3bps over the same period. As a consequence, the 2yr 30yr spread ended August at 131bps the highest level since November 2021. In fact, this spread, which in previous cycles has been a leading indicator of US recessions, has now increased ~250bps since the all time low level of -118bps in mid-2023.

Whilst the normalization back to a traditional positive sloping yield curve over the past two years has been both necessary and healthy, the reasons for the recent spike in the 2yr 30yr spread is ominous to the extent it partly reflects a jump in political interference at the US central bank. Specifically, there has been political pressure building for interest rate cuts pushing down short end yields despite the long term outlook for the US economy and inflation remaining highly uncertain causing a corresponding market driven sell off in long duration risk.

Calls for rate cuts were amplified in early August after a surprise US employment report at the start of the month saw not only a lower July Non-Farm Payroll (NFP) number than expected (73k vs expectations of 105k ) but in addition large scale downward revisions of the previously published May and June numbers. The picture of a US jobs market that was less healthy than previously assumed saw widespread demands for Fed governor Powell to cut rates in September. The Trump administration amplified this call with Treasury secretary Bessant demanding a 50bps cut at the next meeting (and 150bps overall). Even more surprising and concerning however was news that President Trump decided to fire the head of the Bureau of Labour Statistics Erika McEntarfer following the weak NFP report, raising serious fears of potential political interference in US economic data.  Amazingly, despite this chaotic political backdrop, US risk assets were able to extend gains in August as the S&P hit a new record high, up another 1.9%. The USD fell on the back of the soft jobs report although an upward revision of the second quarter US GDP (from 3.0% to 3.3%) announced mid-month helped stabilize the currency.   

Credit markets in both US/Europe and Asia remained largely range bound and hence it was the rally in short-dated US Treasuries that was the main driver of the gains in Asian USD bonds in August. Chinese onshore equities did have a strong month but it was mostly driven by sectors not significantly present in the dollar bond space such as technology and semiconductors. In fact, the best outperforming Asian credit sectors in August were Hong Kong property and ASEAN oil names, mostly on account of catching up from underperformance earlier in the year. The gains for the JKC Asia Bond 2025 portfolio were well spread and even across all sectors and geographies reflecting the now highly homogeneous low risk profile of the fund as it approaches final maturity in December 2025.