General Market Review 

Equities traded mostly sideways until December 18, when the Fed cut interest rates and adjusted its 2025 policy outlook. The 0.25% cut was expected, but the Fed’s revised guidance indicated fewer rate cuts are coming in 2025 than previously expected.

The central bank now anticipates only two rate cuts in 2025, down from the four forecasted in September. This would leave the federal funds rate at a median level of 3.9% by the end of 2025, higher than the previously expected 3.4%.

After the Fed-meeting stocks reacted by selling-off. S&P 500 lost 3% subsequently, whereas 10-year treasury yields skyrocketed around +20 bps in the aftermath of the FED’s decision to a yield of 4.6%. Never before have 10-year treasury yields increased by a cumulative change of roughly +0.95% 100 days after the FED started cutting rates. In Asia, the fixed-income market has moved in the opposite direction. Given China’s subdued growth rates as well as deflationary pressures, China’s 10-year government bond yields have reached a low at 1.675%. This allows China to now borrow at lower interest rates on the capital market and thereby allowing China to spur business investment and consumer-boosting initiatives in 2025.

In the US, the labour market was stronger as non-farm payrolls increased by +227k in November from +12k in October. The unemployment rate was slightly above consensus at 4.2% in November. In the Eurozone, the unemployment rate remained stable at 6.3%.

In the US, consumer price inflation for the month of November was in line with consensus and slightly higher than in the prior month. Headline inflation has increased by +2.7% (y-o-y) whereas core inflation (excluding energy and food) remained stable at +3.3% (y-o-y).

In the Eurozone, consumer price inflation figures for the month of November came in below consensus and higher versus the prior month. Headline inflation has increased by +2.2% whereas core-inflation by +2.7% respectively.

US 10-year treasury yields and German 10-year bund yields have increased by +40 bps from 4.17% to 4.57% and by +28 bps from 2.09% to 2.37% respectively.

The MSCI World Index declined by -2.6% (USD den.) and the MSCI Europe Index by -0.5% (EUR den.).

Portfolio Management Report

The sentiment on bond markets was shaky during December. High yield credit spreads widened unisono: US High Yield (+18 Bp) and Global High Yield (+8 Bp). The US-High Yield credit default swap market – measured as CDX.HY – was in-line with cash bond markets and its CDS-spread widened around 17 Bp from 295 Bp to 312 Bp. After several months of low credit spread volatility, the 1-month volatility on CDX.HY therefore rose from a level of 98 bp to 143 Bp per end of December. In practice this means that the synthetic US High Yield market could have a trading range of 271 Bp to 353 Bp within a one-month timeframe per end of December. In contrast, the trading range priced into the market was only 266 Bp to 323 Bp at the beginning of the month.

The Nordic High Yield primary market closed its books with a record year. The total volume reached USD20bn equivalent at the end of 2024 (whereof roughly 70% was solely attributed to Norway) doubling issue volumes of the years 2020, 2022, and 2023. Moreover, this year’s record is up USD3bn equivalent from the previous record in 2021. Clear trends continued: real estate comprised 37% of the total volume in Sweden and oil services and production accounted for 33% of all Norwegian issuance. In December, a volume of around USD700mn equivalent was purely related to issues from US-Dollar- or Euro. Out of that, approximately 30% was issued from transportation and energy sectors. In the transportation sector, the Danish ship supply company Wrist A.S. issued EUR200mn in a 2029s senior secured floating rate note (FRN) deal priced at an attractive level of 500 Bp above 3-month EURIBOR, currently a coupon of 7.865%. On the US primary market were priced at around USD12.1bn, which was due to the slowdown before the holiday season. Nonetheless, this year’s volume was 59% higher than the previous year and +174% versus 2022 and only 39% lower than the post-covid record year 2021. There were two companies within our focus sectors heading to the US-market in December: oil producer Crescent Energy tapping USD400mn to its 2032s senior unsecured deal priced earlier this year by increasing total issue amount to USD1.1bn. Another relevant deal was Genesis Energy – a hybrid of transport and storage and chemical businesses bought by Quintana Capital in 2010 – that issued USD600mn in a 2033s senior unsecured deal with a coupon of 8%.

During the month of December, the fund has increased its engagement in Nordic High Yield bonds. Ahead of the FOMC meeting on December 18th the effective duration of the portfolio was kept marginally above 2%. Hence, the fund avoided major losses and cope better with the interest rate shock when 5-year treasury yields rose by 20 Bp within a few days to a yield level of 4.46%, which was last seen in June 2024. After the shock, parts of the cash were deployed into longer-dated bonds to lock-in the elevated yield level. In addition, the duration of the fund was increased to 2.2%. Within the opportunistic bucket, one issuer decided to redeem its bonds earlier by making use of a make whole call (MWC) option paying a premium of 16 Bp to bondholders. We did not participate in any new issues that came to the market.

For more information, you can find our latest  Factsheet – December 2024.

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