The Pacific Coolabah Global Active Credit Fund matched its benchmark performance for December. As of 31st December, the Fund’s weighted average yield to expected maturity is 5.70%, which compares favorably with the benchmark yield of 4.69%.
In the month of December, long-term risk-free rates plunged as global inflation data surprised on the downside as a result of goods disinflation or, in some cases, outright goods deflation (the price of oil also slumped 6-7%). The all-important US 10-year Treasury yield fell 45bps in December, which helped drag down yields in Germany (-42bps), Italy (-54bps), and Britain (-64bps). This powered the rally in fixed-rate bonds. In the final analysis, the US 10-year Treasury yield finished 2023 exactly where it started at 3.88% (i.e. basically unchanged).
Looking back on 2023 as a whole, perhaps one of the best indicators of the roller-coaster ride in expectations and volatility during 2023 was the striking movement in 10-year government bond yields. The US 10-year Treasury yield fluctuated from a low of 3.30% around the time of the Credit Suisse collapse to a high of circa 5.00% in October following upside inflation surprises and hawkish sentiments emanating out of the US Federal Reserve.
Lower discount rates and possibly some year-end window dressing by investors who are overweight equities contributed to the rebound in speculative asset-classes in December with robust total returns reported by the S&P500 (up 4.54%), the Eurostoxx 50 (3.22%), the FTSE 100 (3.85%), the Nasdaq 100 (5.56%), and Bitcoin (11.08%).
Cash and synthetic credit spreads compressed strikingly in December in sympathy with the broader risk rally. In the underlying physical credit (or “cash”) market, investment-grade corporate spreads unsurprisingly declined in December in the US (down 5bps), Britain (9bps), Europe (9bps.)
The Fund benefited from this decline in risk free yields and compression in spreads. Throughout the month, the portfolio took profits on various positions ahead of expected significant primary issuance in January 2024. December is typically a lean month for supply and the portfolio concluded the month with substantial capacity to exploit the resumption of primary supply given its very high cash weight of almost 20%. The portfolio managers believe that January should liberate a rich range of primary opportunities with attractive new issue concessions.
