October net performance was a positive +0.59%. The month was more active after the summer doldrums, kicked off by a spat between the US and China over access to rare earth metals and Trumps’ immediate proposed 100% tariff retaliation tipping the recessionary odds again. This calmed down later following a Trump Xi meeting. A mini-US regional bank crisis caused jitters after fraud and bad loan disclosures came to light for Zions and Western Alliance Bancorp’s. Delayed inflation data arrived below expectations mostly due to weaker housing components. Despite the strength in trade sensitive categories (think tariffs), a lower headline number solidified expectations for a 0.25% cut from the Fed at its October FOMC meeting. In a vacuum of macro data, the path of least resistance was lower yields but the rally reversed quickly as Fed Chair Powell was at pains to explain a further move in December was ‘not a forgone conclusion’. The Fed’s additional announcement that QT was ending provided some relief to the funding markets that are showing signs of liquidity pressure. Better than expected inflation data in the UK increased odds of a November BoE cut and rumours of larger fiscal headroom at the upcoming budget finally delivered the positive news Gilt investors have been waiting for, rallying 30bp over the month. In Japan the first female PM was elected. Sanae Takaichi has struggled to convince international investors that her expansionary fiscal policies combined with suppressed interest rates will slow down the pace of price increases. The playbook for irresponsible government is familiar by now: weaker currency and steeper curves.
The portfolio added 3 new trades, 3 trades were unwound, (1 stop out and 2 expiries).
Curve positions contributed +16bp to performance. Mainly coming from relative value trades in UK Gilts.
Duration was positive +14bp, mostly coming from an outright long position in the front end of JPY curve.
FX positions were negative -15bp mostly from short USD/JPY fx cross.
Inflation positioning resulted in a -12bp contribution over the month, largely due to the move lower in UK inflation expectations.
Spread positions were up +27bp. As the yield differential between Italian BTPs and other Eurozone issuers continued to tighten to levels not seen since 2010, the yield premium built into longer dated Italian bonds continued to decline. This benefitted long-held BTP spread flattening exposure. Relative stability in the UK macro data alongside market-positive inflation and fiscal headlines helped UK Gilts to outperform swaps driving positive performance of spread tightening positions.
Volatility positions retracted -13bp as markets subsided. The largest draw came from lower CADUSD FX realised volatility, and the biggest positive from USD volatility on medium term maturities outperforming long maturity.
Cross Currency Interest Rate positions contributed +13bp. The main effect came from GBP and NOK rates compressing vs SEK rates in medium maturities. The biggest draw was from NZD curve steepening against other markets.
