Overview
“Higher for longer doesn’t mean more rate hikes.”
Silverdale Monthly Commentary, Sept 2023
The US Federal Reserve not hiking interest rates for two consecutive meetings signaled that the current monetary policy is restrictive and inflation is heading down, reducing the necessity for further rate hikes. Sensing peaking of interest rates, investors rushed-in pushing down the bond yields and spurring a bond rally.
Bonds perform well around Fed pauses
US Treasury yields reached their highest point in mid-October, with the 2-year, 5-year, and 10-year UST yields peaking at 5.1%, 4.9%, and 4.9%, respectively. Currently, these yields are 30-60 bps lower. Investment banks are forecasting 0.5%-2.5% rate cuts in 2024 as against Fed dot-plot hinting 0.50% rate cut in 2024.
Opportunity cost to being late:
bond yields fall rapidly after rate hikes
Over the past five rate hike cycles, the JP Morgan Cash Index USD 3-months yield dropped by 2.2% within 18 months following the final rate hike, as follows:
Figure 1: Rate cuts can come rapidly after the final rate hike
Being late in the bond markets carries a potential cost for investors. Historically, a bond rally hasn’t required a rate cut. Past trends show that when the Federal Reserve reaches the peak of its rate hike cycle, the subsequent period often witnesses exceptional overall bond performance, as detailed below:
Figure 2: Bond returns after the Fed rate hike pause (1984-2023)
A moderation in economic momentum
The US economy is showing early signs of slowdown with Atlanta Fed’s GDPNow model forecasting GDP growth of 2.1% in 4Q23, compared to 4.9% annualized growth in 3Q23. In the face of restrictive monetary policy, the defaults and delinquencies in lower-quality credits are increasing. Both auto loans and credit cards delinquencies have doubled/tripled to raise to the pre-pandemic levels.
Figure 3: Rising auto loan and credit card delinquencies
Importantly, the labour market is cooling, with easing nominal wage growth, higher jobless claims, and lower vacancies. The unemployment rate ticked up to 3.9% (Oct’23) from 3.8% (Sept’23).
In October’23, US CPI were below market expectations. Headline CPI was 3.2% YoY (vs. 3.7% in Sep ’23), and core CPI stood at 4.0% (vs. 4.1% in Sep ’23).
The tightening of bank lending standards has resulted in a sharp drop in credit to the real economy which will further drag economic activity and push inflation down.
Figure 4: Restrained credit flows to the economy
China steps up stimulus measures
China is proposing a White List of 50 property developers, both SOE and POE, eligible for funding support, including unsecured borrowings. This comes on the heels of a RMB 1 trillion initiative for urban village renovation and affordable housing program. We are watching the development cautiously.
Maturity of Silverdale FMP 2023
Silverdale Fixed Maturity Fund 2023, which matured on Friday, 24th November 2023, has delivered +23% as envisaged at its inception in September 2020, as against 3-year US Treasury return of 0.50%, Bloomberg’s Global Aggregate TR Index decline of circa -20% and Bloomberg US Corporate TR IG Index loss of circa -15%, during the same period (2020-23), as follows:
Figure 5: FMP provide more predictable returns to investors
For fixed maturity portfolios, the Bloomberg Systematic Strategies Report highlights: “By holding the underlying bonds to their maturity, these portfolios mitigate the mark-to-market risks that stem from interest rates fluctuations and achieve the investor’s cash flow objectives with greater predictability.” The report also notes for a 5-year Fixed Maturity Fund, the deviation from the initial indicative yield is only 8.5%, reducing the performance volatility.
Silverdale Fixed Maturity Portfolios, with embedded leverage, exhibit a Sharpe Ratio nearly double that of open-ended funds or indices. These portfolios emulate the structure of an individual bond, while maintaining diversification benefits and reducing volatility through decaying duration.
Silverdale Funds are market leaders in enhanced-return FMPs, combining current elevated yields, enhanced further through prudential leverage, as evidenced by their successful track record.
November Performance
For November 2023, the Bloomberg Emerging Markets Asia Total Return Index increased by about 3.7% and Bloomberg EM USD Corp and Quasi 1-3Yr Index which increased by 1.2%, while Silverdale Bond Fund NAV increased by 3.3%, and the NAV for various Silverdale Fixed Maturity Funds increased between +0.6% to 4.2%. The flagship Silverdale Bond Fund remains well-positioned to take advantage of the high carry offered by high-quality bonds, holding 77% Investment Grade bonds, with a duration of 2 years, yet offering a leveraged YTM of 14%.
We thank the investors for strong interest in Silverdale Fixed Maturity Fund October 2026 and November 2026.
To lock-in current prevailing high yields, we have launched a new 4-year Silverdale Fixed Tenure Fund.
We are grateful to you for your support.
DISCLAIMER
THIS COMMENTARY IS AN INTEGRAL PART OF AND SHOULD BE READ ALONG WITH THE FUND FACTSHEET FOR NOVEMBER 2023. This document is written for the benefit of and is being communicated exclusively to Accredited Investors or Institutional Investors as defined under the Securities and Futures Act (Cap. 289) of Singapore. The above commentary does not provide a complete analysis of every material fact regarding the market, industry, security, portfolio, or any Silverdale fund. It is not a recommendation to buy or sell any security nor an investment advice. The portfolio holdings, opinions and information may change without notice and the actual results may differ from the said opinions and estimates. The contents of this document, including any narrative, does not constitute an offer to sell or a solicitation of any offer to buy the units or any Sub-Fund or class of the Silverdale Fund VCC (the “Fund”) or any of the funds managed or advised by Silverdale Capital Pte Ltd., and is strictly for educational purpose only. The distribution of the shares of the Fund may be restricted in certain jurisdictions. It is the responsibility of the person or persons in possession of this communication to inform themselves of, and to observe all such restrictions, all applicable laws, and regulations of the relevant jurisdiction, including of any applicable legal requirements, exchange control regulations and taxes in the countries of their respective citizenship, residence, and domicile. Any subscription for units or shares must be made solely based on the Fund’s private placement memorandum, applicable class supplement) and Subscription Documents (together “the Offering Documents”). Past performance is not an indicator of future performance. The Fund uses leverage and invests in financial derivative instruments. Please refer to the Offering Documents for Risk Factors. Nothing in this document is intended to constitute legal, tax, securities or investment advice or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. Please seek opinion from an independent professional adviser before taking any decision based on this document.