The FIIG Monthly Income Fund returned 0.50% net of fees in January, outperforming the AusBond Bank Bill Benchmark by 0.11%. This brings total outperformance (net of fees) to 1.14% since the fund’s inception in October 2024.
Market Commentary
For bond investors, January felt like an entire economic cycle squeezed into a single month. 10-year Australian Government Bond yields endured a 50 basis point roundtrip, initially selling off into President Trump’s inauguration prior to reversing course into month-end. Our yield curve steepened to its highest spread in around two and a half years as the market nearly fully priced in an RBA easing cycle commencing in February, due to the domestic CPI print. The same dynamic has seen the yield on the benchmark for the fund, the AusBond Bank Bill Index, fall to 4.27%.
At the longer end of the yield curve, the intramonth volatility suggests that the market is struggling to decipher between signal and noise when it comes to the incoming US administration. From the extensive list of executive orders on Day 1 to near-immediate tariffs levied against its closest trading partners, the intersection between the growth / inflation impacts of policy vs. the strong starting point for the US economy is the key assessment for the next 3 – 6 months.
As of right now, it seems as though the disinflationary impulse in the US has stalled whilst the growth outlook is increasingly cloudy when so much geopolitical uncertainty abounds. If the DeepSeek thesis (much cheaper / more efficient AI model) has further to run, this could add to growth pressures as a good proportion of current US GDP growth is being supported by AI-related capital expenditure.
Overall, these dynamics augur for flatter interest rate curves, particularly if the DOGE crew is successful in reigning in government spending. Credit spreads remain remarkably sanguine and demand for newly issued corporate bonds remains very strong.
Positioning
At the end of the month, the fund yield fell slightly below 6% as yields rallied across the board (including the benchmark, as previously mentioned). Interest rate duration totalled 0.9yrs by month-end while the fund had grown to cAUD36m. All portfolio holdings are currently AUD-denominated.
We remain interested in tactical interest rate trading at current levels, with the current yield curve steepness allowing duration to act as a hedge for the corporate bonds trading at optically tight spreads. February’s reporting season kicks off soon and we’d expect some meaningful non-financial corporate supply in its wake.