Poor US inflation figures exceeded the worst expectations and triggered a rout in bond markets, which in turn triggered a further sell-off in equities to new lows for the year.
The UK ten-year yield jumped to a high of 2.58% (a 6% fall in capital value), duration, as ever, being the risk at such times - the thirty-year gilt fell 14% to a yield of 2.72%. US bonds followed a similar pattern with the ten-year yield hitting 3.47%. In the eurozone, a steep fall in Italian ten-year bonds took the yield up to 4.2%, raising fears of a repeat of the eurozone ‘PIIGS’ crisis of 2011.
The US Federal Reserve meeting concludes tonight and they are widely expected to raise rates by 75bp (to 1.75%), accompanied by some hawkish commentary, as Jerome Powell attempts to restore the Fed’s inflation-busting credentials. Further increases are expected over the course of the year, as reflected in US two-year bond yields currently at 3.3%. The European Central Bank and the Bank of England face similar problems, the latter is expected to raise rates again on Thursday, the Bank of Japan is in a strange place, defending low rates and watching an on-going slump in the yen, now down by 17% against the US dollar over the year.
Late May and early June had seen a modest recovery in stock markets, but this was reversed rapidly after the inflation data, taking the US indices down by more than 20% for the year and more than 30% for the NASDAQ. Other markets followed suit though the falls were a shade less dramatic.
As we always remind our investors, Tenax cannot avoid an ‘all asset class’ sell-off such as we are experiencing at the moment; what we can do is mitigate the extremes and aim to take advantage of the re-pricing that is going on. So, we are continuing to edge-up the Fund’s exposure to credit, where opportunities now abound (at the short end), though, as before, we do not wish to increase the overall duration, which remains at 2.2 – see chart, right.
That 35% allocation to ‘Fixed Interest’ now has a redemption yield of 4.9% from an average price of 91p in the pound, what a contrast to the position 18 months ago when yields were derisory. The yield on our book of floating rate notes is rising as their coupons go through their quarterly resets, a further increase in the base rate will lift them higher again.
Within the portfolio, we have funded the increase in credit exposure with modest reductions in the short-dated floating rate notes and expect to continue with this as pricing gets more attractive. We have also edged-up equity and convertibles exposure along with infrastructure. The latter has done well, we added further to our battery storage exposure taking a further placing from Gresham House Energy Storage but are beginning to reduce the more ‘conventional’ infrastructure holdings as their pricing is exposed to an increase in discount rates.
To end on a brighter note, a brilliant meme from David Mortlock at Berenberg, see right.
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