February 2025

Performance

Strong returns continue for the Fund. The return for February was 0.65% for the month and posted a 1.74% gain for the quarter, eclipsing the cash benchmark which gained 1.07% for the quarter.  The Fund continues to outperform the Ausbond Indices for the Composite0-5, Composite All Maturities and the FRN index.

Market Insights

Volatility of returns is coming and not in an expected way. The Trump put is under pressure as markets realign and account for the possibility of tariffs. The impact of Trump’s policies on global markets are yet to eventuate however there are mounting concerns. Inflation appears to be falling. Central Banks are starting to ease in what at this stage is a normalisation of rates. If so this should be good for asset prices.

Key Contributors & Detractors

Over the month credit spread contraction of some 10 bp was the main driver of performance. The main performers and the continuing theme were the performance of hybrid T2 securities. The recent Transgrid issue with overwhelming support is an example. Across the various sectors, bank spreads tightened as did infrastructure.

Demand for higher yielding securities or securities providing diversification were key drivers.

Outlook & Strategy

The changes in the qualification of  what may be included in the Ausbond Indices will over time drive spread contraction in Tier 2 hybrid securities. Demand for these assets will be driven by Index Funds in the first instance and passive funds. Another driver of demand is these assets will be seen as a replacement for the now redeeming At1 securities. With APRA now expecting Banks to not issue At1 and as there are approximately $5.2bln maturing this year, it is expected that some of that money will be invested in Bank Tier 2, and corporate hybrid Tier 2 securities. Other drivers of demand are newly established funds with mandates to purchase Tier 2 securities. The impact of inflation and how it is managed will drive expectations. Imposed tariffs will only cloud the situation. Interest rates are likely to remain within a tight band and possibly may remain at current levels for some time. Corporate spreads remain tight however there is a chance for some widening of spreads.

Domestic and kangaroo issuance continues and is now at record levels. Investors continue to support the domestic market and investor support will be a key driver if markets experience some fallout from Trump’s tariffs. Some volatility is expected over the short term. With the imposition of tariffs, many pundits will be watching inflation. What happens to inflation will likely decide the direction of markets.

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