August was rich on headlines but not very rich on action, as yields on US Treasury bonds finished the month unchanged.
Continued concerns around prolonged conflict in the middle east kept energy prices elevated and rates markets on edge. Preparation for the upcoming heavy issuance in government and corporate debt only added to the concerns.
In the first half of the month, rates markets were still digesting dovish messaging from Warsh at the last post-FOMC press conference and weak labour market report from the US that showed jobs contracting by -23k instead of expected increase of +55k. As front-end yields remained capped, yield curves steepened and long-term yields surged to multi-decade highs – US 30-year Treasuries touched 5.34% while German and UK long-end yields flirted with historic peaks.
Fiscal strains were mirrored in currencies with the US Dollar Index and gold rallying.
The second half of August saw Central bank pricing turning decisively hawkish as Brent crude oil prices climbed above $90 per barrel. Governor Warsh’s Jackson Hole speech at the very end of the month accelerated the flattening with odds of September hike from the Fed reaching 60%. With the ECB also fully priced to raise rates at the next meeting to head off second-round inflation risks.
No trades were added or exited in the portfolio.
Curve positions added +18bp with the main contributors being Relative Value positions in the short end of NZD yield curve and the long end of GBP yield curve.
Volatility added +10bp with contributions form JPY, GBP and AUD interest rate volatility.
Duration added +8bp, where most performance came from the long positions in the short end of NZD yield curve.
FX added +6bp from shorts in AUDNZD and GBPUSD.
Inflation, Cross Currency Interest Rates & Spreads were broadly flat.
