2023 turned out to be another challenging year for fixed income managers.

First, China, the world’s second largest economy’s recovery coming out of the pandemic lockdowns fell short of expectations. Secondly, the US 10-year treasury yields have also climbed to a record high of 5% in October, the highest level in 16 years.

Persistent inflation, sustained by a tight labour market and resilience of the economy forced the Fed to maintain a “higher-for-longer” stance, putting upward pressure on bond yields. A combination of these factors resulted in high yield and short-duration bonds outperforming for most of last year.

It is only in the last 2 months of the year that we observed a massive rally in long-dated US Treasuries and global credit asset classes across the board, following a dovish-pivot from the US Fed. Our fund had benefited and clocked a positive return of 3.55% during the year. We are pleased that 2023 ended well, rewarding long-term investors who have stayed invested.

As we embark into 2024, a number of questions from last year remain unanswered. Is global inflation truly under control? Will the US achieve a soft landing? When will global central bankers begin easing their monetary policies? How will the ongoing geopolitical tensions affect the world’s economic outlook and markets?

Economies are beginning to feel the pain of higher interest rates. The European region is struggling, while the US and Asia Pacific is faring better than expected. This has resulted in higher European credit spreads across the board.

While the drop in yield in last 2 months has been beneficial for the credit markets, we believe that the market may have run ahead of itself, expecting the US Fed to begin cutting rates from March. This high optimism will likely be met with more volatility in the coming months.

There remain lingering concerns over global inflation one hand and the potential for a recession on the other. We believe that global credit markets, particularly high-quality investment grade corporate bonds, stand in good stead to weather these challenges . The decent yield carry coupled with strong corporate fundamentals of quality investment grade bonds should cushion the oncoming economic challenges better, especially if the global economy takes a sharp downturn due to the prolonged high interest rate environment.

With that, we wish all investors successful investing in the year of the Dragon!

30 Dec 2023