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August net performance was positive at +0.30%. The dominant factor was the US Non-Farm Payrolls data at the beginning of the month. It contained negative revisions to the previous 2 months of 258k, meaning only 33k jobs growth over the period. This raised concerns about the momentum of the US economy and switched the Fed from focussing on inflation to employment. Powell was soon to rubber stamp a September cut at the Jackson Hole Symposium and hint for more, should jobs continue to slow. Rates rallied and curves steepened over the month as odds of cuts were dragged forward and increased. Independence of the Fed was questioned further with Trump’s attempted firing of a sitting governor, the legitimacy to be decided in court. Elsewhere in G10, France is heading to a parliamentary no-confidence vote on their budget, and in the UK fears over the lack of fiscal prudence continued, weighing on both long end Oat and Gilt yields.
The portfolio added 1 new strategy while 2 hit target, and 1 trade expired.
Curve positions contributed 21bp to performance. The performance mainly came from long maturity IRS curve positions in EUR, USD and GBP.
Duration was negative -17bp largely due to a payer fly in 1yr US caught by the post NFP rally in short maturity rates.
FX positions were net flat over the month.
Inflation positioning resulted in a +8bp contribution over the month, largely due to higher US CPI expectations vs HICP.
Spread positions were down -12bp. This was predominantly from BTP spreads in the 30y underperforming 10y. A forward UK spread between gilts and matched maturity swaps also cheapened.
Volatility positions retracted -23bp as the markets subsided. The largest draw came from A decrease in AUD rates volatility in longer maturities and expiries.
Cross Currency Interest Rate positions contributed a net positive of +33bp. The main contribution came from USD rates curve steepening vs equivalent GBP and CAD.
