Q3 Credit Opportunities Fund Commentary

The US headline inflation remained elevated, though it has tapered down over the past 3 months from the June highs of 9.1% to 8.2% in September. However, the persistent strength in wages, rentals & food prices, has reinforced the view that the Fed will remain hawkish longer than earlier anticipated.

The markets have thus re-adjusted their expectations, driving the US 10-year treasury yields higher.  The short June rally gave way to renewed selling, reaching new lows in September.

Adding on to the volatility, The U.K. gilts sold off in response to the £45b package of tax cuts announced by the newly-elected leadership in the U.K. in September, a clear policy mistake in the midst of strongest inflation. The selloff reverberated beyond the 2nd quarter and sparked dramatic margin calls on the UK pension funds, the Bank of England’s intervention, and the eventual stepping down of the newly installed Prime Minister of U.K.

The series of events highlights the unprecedented challenges that leaders and central banks had to grapple with this year. So far in 2022, the US 10-year yield rose from 1.5% to almost 4%, and U.K. gilt yields have more than quadrupled from less than 1% to over 4.2%. German bund 10-year yields have risen from negative -0.25% to over 2.2%. Italian bond yields have risen from 1% to over 4.5%.

As of the end of September, the fund holds almost 30% cash in the portfolio, which puts us in a good position to take advantage of the current market weakness and reposition the portfolio to high credit quality in this downturn.

Sep 2022