September net performance was a positive +0.08%. The month was relatively quiet to round off a calmer summer quarter compared to the Q2 volatility; September NFP data did not counter the weak US labour force highlighted by the revisions in August. This confirmed the Fed focus away from exclusively on the inflationary effects of tariffs, to the employment side of their dual mandate. It also led to initiating a FOMC rate cut after 9 months of pause. Short rates duly rallied, and curves steepened, as odds of further cuts were dragged forward and magnified. Independence of the Fed was questioned further with Trump’s attempted firing of a sitting governor, the legitimacy to be decided later in court. Elsewhere in G10, France and the UK suffered with long bond yields widening versus peers, over continued fears on the lack of fiscal prudence.
The portfolio added 5 new strategies, while 2 stopped out and 3 trades expired.
Curve positions contributed +23bp to performance. Mainly coming from long maturity IRS flattening curve positions in JPY and somewhat offset by stopping out of NZD long end curve flattener.
Duration was negative -4bp from long JPY Dec 25 meeting date.
FX positions were a small negative -8bp from short AUD/NZD fx cross via options.
Inflation positioning resulted in a -2bp contribution over the month, largely due to lower US CPI.
Spread positions were up +27bp. This was from a BTP spreads in the 30y underperforming 10y; and an outright CAD implied forward asset swap.
Volatility positions retracted -25bp as the markets subsided. The month continued to dampened volatility pricing to attractive lows. We maintain the macro environment is vulnerable to shocks from many fronts and remain cautiously long volatility in a variety of G10 rates and FX exposures. The largest draw came from a stop out in GBP 1yr OIS vol, and biggest positive from JPY vol on medium term maturities outperforming longer maturity.
Cross Currency Interest Rate positions contributed a draw of -19bp. The main effect came from USD rates curve steepening vs equivalent GBP and NOK vs SEK compression in medium dates, and small positive offset came from a long GBP vs SEK in medium term rates.
