April 30, 2024
Commentary
Monthly commentary discusses recent developments across the Ninepoint Diversified Bond, Ninepoint Alternative Credit Opportunities and Ninepoint Credit Income Opportunities Funds.
Economics
U.S. inflation continues to surprise to the upside, dispelling this notion that the elevated price pressures seen so far this year were merely a “bump in the road”. With that, it has become clear that the path to rate cuts this year has narrowed significantly. As Figure 1 shows, the bond market has gone from pricing 1.6% of cuts in January to now only 0.3% for all of 2024. Here in Canada, despite lower inflation readings and a softer labour market, we have also seen expectations for rate cuts get downgraded significantly, from 1.5% earlier this year, to about 0.5% at the end of April.
At the April/May FOMC meeting, Chair Powell himself acknowledged the persistent strength of U.S. inflation, and aligned himself with market expectations, casting doubt on the likelihood of rate cuts in the near term. But importantly, he made sure to quell markets’ fear that he might be thinking about increasing rates if inflation proved too persistent. The bar is now very high for the Fed to consider further rate hikes, and during the press conference, Powell insisted that monetary policy is sufficiently restrictive, and that it was unlikely that the next move would be a hike. Overall, the message was that of a patient Fed, that is happy to wait for monetary policy to work its way through the system.
With only 0.3% of rate cuts priced-in for 2024, the current situation feels eerily similar to October 2023, where we saw peak hawkishness in monetary policy and positioning by investors. At this point in the cycle, expectations for monetary policy are the main driver of interest rates across the yield curve, and with the recent selloff, we believe rates are much more attractive. When the pendulum swings too far one way or another, it doesn’t take much to trigger a rapid repricing.
Since month end, we have been seeing signs of a shift in sentiment. The April U.S. employment report was soft across the board, resulting in a strong bid for bonds. We believe for those who had missed the 2023Q4 rally, this most recent repricing could offer a great entry point for duration.
Credit
As per Bloomberg, Canadian investment grade spreads continued their march tighter in April, with spreads narrowing another 4bps and outpacing the 3bps move in the US. Higher beta sectors fared the best while the laggards were utilities and senior banks. It was a quieter month for new issues (only ~$9bln), which, along with positive inflows, helped drive the narrowing. May and June tend to be very busy for corporate bond supply, and our portfolios are positioned for it, with many maturities approaching. Given the potential for supply indigestion in Canada (corporate supply up 57% YTD), we began layering in some additional credit hedges in the Alternative and Credit Income Opportunities funds.
Individual fund commentary
Ninepoint Diversified Bond Fund
April was a challenging month for any strategy with even modest duration, and ours was no exception. Due to the rapid increase in long term interest rates, the fund gave back its YTD gains. We see this setback as temporary; as discussed in the earlier section, we believe that we have reached peak hawkishness on the rates front. Already in May we have clawed back more than half of last month’s drawdown.
Otherwise, there has been little change to our positioning. We continue to barbell the fund between high-quality low-coupon short-term corporate bonds for income and long-term government bonds for ballast. With high yield priced to perfection, we also have a small short position in the U.S. Index ETF. There are very few pockets of value left in credit markets, so we are content to keep risk low and wait for better opportunities to emerge. Nonetheless, with a yield-to-maturity of 7.6% and a cash yield of 4.6%, investors are getting reasonably paid to wait.
NINEPOINT DIVERSIFIED BOND FUND - COMPOUNDED RETURNS¹ AS OF APRIL 30, 2024 (SERIES F NPP118) | INCEPTION DATE: AUGUST 5, 2010
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
Fund |
-1.6% |
-0.5% |
-0.3% |
6.0% |
3.0% |
-1.3% |
0.6% |
2.1% |
3.1% |
Ninepoint Alternative Credit Opportunities
While credit continues to perform well, gains have become more modest as we approach the 2021 tights in credit spreads. The fund was down 16bps in April (+2.21% YTD), entirely due to our long-term government bond exposure, which we expect will bounce back. Overall, we haven’t materially changed our positioning (nor do we expect to), with portfolio stats almost unchanged month-over-month (yield-to-maturity of 8.6% and a cash yield of 6.7%, leverage 0.7x). We continue to seek cost-effective ways to protect our portfolios against adverse events, and with credit spreads so tight, we found some compelling relative value hedges, which we are slowly layering on.
NINEPOINT ALTERNATIVE CREDIT OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF APRIL 30, 2024 (SERIES F NPP931) | INCEPTION DATE: APRIL 30, 2021
1M |
YTD |
3M |
6M |
1YR |
Inception |
|
Fund |
-0.2% |
2.2% |
1.7% |
7.4% |
7.5% |
0.5% |
Ninepoint Credit Income Opportunities
Similar to the Alternative Credit Opportunities fund, our government bond exposure was the main source of performance drag, taking the fund down 2bps in April (+2.70% YTD). Otherwise, positioning remains the same. Portfolio stats are almost unchanged month-over-month (yield-to-maturity of 9.0% and a cash yield of 6.6%, leverage 0.7x). Because we carry more credit risk in this strategy, we scour the markets for cost-effective credit hedges, particularly with credit spreads so tight. We found some compelling relative value hedges which we are layering on slowly. Please reach out if you would like to learn more.
NINEPOINT CREDIT INCOME OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF APRIL 30, 2024 (SERIES F NPP507) | INCEPTION DATE: JULY 1, 2015
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
Fund |
0.0% |
2.7% |
1.9% |
7.3% |
7.6% |
2.1% |
5.0% |
4.6% |
Until next month,
Mark, Etienne & Nick
Ninepoint Partners