Overview
“We don’t need to be in a hurry to cut …. the US economy is growing at such a solid pace, … the labor market is still very, very strong, … we can wait” (to cut the interest rate).
Jay Powell, Fed Chair, 29 March 2024
Silverdale Funds do not require rate-cut to outperform given their embedded leverage they are designed to outperform even if there are no rate cuts.
Sticky inflation led by shelter
US February CPI at 3.2% YoY (est. 3.1%) and Core CPI at 3.8% (est. 3.7%) overshot the consensus estimates. The index shelter and gasoline contributed over sixty percent of the monthly increase in the headline index. Powell aptly noted that “there’s reason to think that there could be seasonal effects there” (in recent CPI inflation numbers); as evident from Figure-1 below:
Figure 1: Jan & Feb CPI prints over the last few years were high
As discussed earlier the journey to reach 2% inflation target will be bumpy. The Fed has indicated the time to achieve 2% inflation target is 2026.
Figure 2: US headline CPI trending to 3.6% by June when Fed expected to cut rates
- Source: US BLS, Mar 2024
- Source: US BLS, Vontobel, Mar 2024
- Source: US BLS, Vontobel, Mar 2024
US labour market cooling gradually
In February, US nonfarm payrolls surged by 275,000 jobs, surpassing expectations; however, the job gains of the preceding two months were reduced by 167,000. The unemployment rate rose by 0.2% to 3.9%, its highest level in over two years.
Fed not in hurry to cut interest rate
While the rates were unchanged in Fed March meet, the GDP growth for 2024 was revised from 1.4% (Dec’23) to 2.1%, the pace of rate cuts were reduced, and importantly long-term rate was increased to 2.6%.
Figure 3: Projections of Federal Reserve Mar’24 vs Dec’23
Interest Cost
The US national debt is increasing at a rate of $1 trillion every 100 days, projected to reach $35 trillion by May 2024. Unchanged trend of debt and treasury rates will increase annual interest costs for the US government from $1.1 trillion to $1.6 trillion, with refinancing at average coupon of 4.4% over the next 12 months. However, a 150-bps cut over the next 12 months would drop interest costs to $1.2 trillion.
Figure 4: US interest payment scenarios
- Source: US Federal Reserve, Mar 2024
About 25% of the Total Revenue of US Government
- Source: BofA Research, Mar 2024
Profit lies in action, not speculation
Fed Dot Plot is a signaling tool to get the market to (re)act in the desired fashion, and not interest rate forecasts! Historically, the actual Fed rate hikes (cuts) have been slower (faster) than those projected based on Dot Plot.
Figure 5: Fed Fund Rate vs Fed Dot Plot
Importantly, even the markets are usually wrong as to the potential Fed action:
Figure 6: Fed Fund Rates vs Market Implied Fed Fund Forecast
Hence, instead of trying to time the market, it would be wise to seize the elevated bond yields.
Figure 7: US Corp IG Bonds: All-in yields at attractive levels
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.
- Source: Bloomberg, Brooking institute, Mar 2024
- Source: Deutsche Bank, Feb 2024
- Source: Bloomberg, Silverdale, Mar 2024
Figure 8: Bond returns (%) after the Fed Pause (1984-2023)
Silverdale Funds, with their embedded leverage, are designed to ‘out-perform’ the markets even when there are no rate cuts. Hence, it is savvy to lock-in prevailing high yields.
March 2024 Performance
For March 2024, the Bloomberg Emerging Markets Asia Total Return Index returned 1.0% and the Bloomberg EM USD Corp and Quasi 1-3Yr Index rose 0.9%. In comparison, the Silverdale Bond Fund NAV increased by 1.5%, and the NAV for various Silverdale Fixed Maturity Funds increased between 0.4% to 1.5%.
Figure 9: Silverdale Funds performance since Nov’23 (Fed Pivot)
Silverdale Bond Fund continues to capitalize on the prevailing high yields offered by high-quality bonds, holding 77% Investment Grade bonds, with leveraged YTM of 8.97%, pointing to higher potential returns.
Empirically, fixed tenure funds render higher assurance of potential returns, in this regard: Silverdale Fixed Tenure Fund Nov 2027 with target return of 8.75% p.a. +/- 0.25% (with dividend payout of US$ 7.00 p.a.) provides an exciting investment opportunity.
We thank you for your support.
DISCLAIMER
THIS COMMENTARY IS AN INTEGRAL PART OF AND SHOULD BE READ ALONG WITH THE FUND FACTSHEET FOR MARCH 2024. 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.
- Source: Silverdale, Columbia Threadneedle Investments, Nov 2023
- Source: Bloomberg, Silverdale, Mar 2024
- Source: ‘Index it like Bond’ Bloomberg Aug 2023