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General Market Review<\/span>\u00a0<\/strong><\/p>\n October was another strong month for risk assets; equities broadly continued their rally which was fueled by signals of easing in the US-China trade war. In that environment the S&P 500 rose 2.3% and the Stoxx Europe 600 advanced 2.5%. Apart from the strong market performance, the IMF warned in the October edition of its world economic outlook of elevated vulnerabilities and reiterated that risks are tilted to the downside: Prolonged global trade uncertainty, shocks to labor supply and a repricing of new technologies are some of the major risks mentioned therein. Rising fiscal worries could lead to increasing borrowing costs and overall debt level and could erode the convenience yield on the sovereign debt of some advanced economies. A repricing of core government bond yields could be amplified by maturity mismatches and leverage among non-bank financial intermediation that could trigger disorderly price corrections. According to the IMF, global growth might slow down to 3.2% in 2025 and 3.1% in 2026. The projections for 2026 are divided: The US was revised up from 1.7% to 2.1%, the Euro Area was revised down from 1.2% to 1.1%. China, on the other hand, experienced an upward revision from 4% to 4.2%.<\/p>\n On October 29, the FED\u2019s board of governors unanimously approved a rate cut of 25 Bp bringing down the policy rate to 3.75% (lower bound) to 4.0% (upper bound). Since the likelihood of a 25 Bp rate cut was at 99% ahead of the meeting, this was fully in line with market expectations. Again, the FED reiterated the data dependency and pointed out a December rate cut would not be a foregone conclusion. This is partly because of the lack of reliable economic data during the US government shutdown. As of October 31, the probability of a December cut decreased from 78% to 68%. This corresponds to an effective rate at 3.71% versus 3.86% currently. In the US, there was no release of non-farm payrolls due to the shutdown. However, the employment report published by ADP gave an indication that labour market may have shrunk. In the Eurozone, the unemployment rate was stable at 6.3%.<\/p>\n In the US, consumer price inflation for the month of September was slightly higher versus the prior month. Headline inflation has increased by +3.0% (y-o-y) whereas core inflation (excluding energy and food) came in lower at +3.0% (y-o-y). In the Eurozone, consumer price inflation figures for the month of September were higher versus the prior month. Headline inflation has increased by +2.2% and core-inflation has increased by +2.4%. US 10-year treasury yields decreased by 7 Bp from 4.15% to 4.08%, whereas German 10-year bund yields have decreased as well by 8 Bp from 2.71% to 2.63%. The MSCI World Index increased by +2.0% (USD den.) and the MSCI Europe Index rose by +2.55% (EUR den.).<\/p>\n Portfolio Management Report<\/strong><\/p>\n In October, credit conditions were broadly stable. High Yield cash spreads drifted wider by 14 Bp in the US and 25 Bp in Nordic High Yield (+14 Bp in Global High Yield). Synthetic spreads on the 5-year CDX.HY widened by 7 Bp from 321 Bp to 328 Bp. The total return for the month was as follows: US High Yield market gained +0.2% (Global High Yield: +0.24%) and Nordic High Yield achieved +0.4%. Thus, the performance was entirely driven by carry (income return). After several months of solid strength, the Nordic HY market delivered somewhat weaker returns in October. While this still outperformed the other High Yield markets, it marked a clear slowdown from recent momentum. The share of bonds priced at distressed levels was unchanged, otherwise the share of bonds trading above par decreased from 74% to 68%, indicating some kind of normalization. Most interesting to us is that the share of bonds that were trading between 90% and par increased slightly. An explanation might be that investors could become more selective.<\/p>\n On the US market, the riskiest tier of the junk bond market suffered its first monthly loss in six months generating -0.42%, and spreads widened by 58 Bp. We are still in the midst of the US government shutdown that began on October 1, meaning that no economic data has been available since then. The current spread (to treasuries) of the broad US High Yield Index is at 294 Bp and slightly below the one-year average of 300 Bp. Within our core sectors, a few relevant companies entered the market. The most relevant issuer was Navios Maritime Partners LP. Navios is rated at Ba3\/BB, a leading shipping company currently owning and operating a fleet of 175 vessels. The company is well diversified between dry bulk, container and crude oil tankers. Navios has around USD1.2bn of unencumbered vessels \u2013 which is c.20% of total fleet value \u2013 and a net Loan to Value (LTV) of 34%. The deal was initially announced at low to mid 7% in yield terms, but during the bookbuilding the yield was uplifted to high 7% and finally priced at 7.75%. By issuing a 5-year senior unsecured note, the company collected an amount of USD300mn, fully covered by books. Bond proceeds are earmarked for refinancing the secured debt of the group.<\/p>\n In the US primary market, twenty deals were carried out in October. With USD17.8bn, this is more subdued compared to the prior month. US High Yield trimmed its gains as FED-chair Powell warned that a December rate cut is not a foregone conclusion. As consequence, yields climbed to 6.82% from 6.73% end of the month. It is expected that the primary market will pick up again and could add USD25bn to USD30bn until the end of the year. We started the month of October with a low cash position of 2% and an investment quota of 107%. Over the course of the month, we increased our allocation to shipping companies by a total of 3% pt. Our exposure to shipping companies is predominantly in companies that are conservatively managed and well diversified within the subsectors.<\/p>\n Additionally, we sold some low-yielding bonds and slightly decreased our allocation to corporate hybrid bonds. At the end of the month, our allocation to USD-denominated bonds was unchanged. Right after the shipping segment, accounting for 24% of total fund volume, the oil service sector accounts for the second largest share of the overall allocation with 20%. The effective duration of the fund was held stable at 2.3%.
The Nordic High Yield primary market remained active in October. After the record volumes in September, new issue volumes in the last month reached NOK29bn. This year\u2019s volumes are now at NOK252bn. A total of 23 deals were priced with an average deal size of NOK 1.2 bn which is in line with this year\u2019s average deal size. The average new issue spread was 532 Bp, and there was a skew to EUR-denominated transactions with a share of around 47%. In sum, 85% of overall placements were issued in a Norwegian format. Nonetheless, non-Nordic issuers accounted for 64%.
This shift coincided with a notable rise in debut issuers (61%). Those debut issuers \u2013 that usually must pay a decent new issue premium \u2013 had to pay a pickup of around 46 Bp versus frequent issuers. The bunch of the issuance was concentrated in Shipping, Real Estate, and Others. A volume of around USD2.0bn was solely related to issues from US-Dollar or Euro. This was 71% of the total volume for the month. Out of that, around 44% was issued by transport, whereof shipping accounted for 35%.<\/p>\n
We participated in the new issue of Navios that was priced on the Nordic High Yield primary market. The bond was attractively priced. At the end of October, the fund’s ordinary income potential, which includes both bond coupons and coupons from synthetic instruments, was unchanged at 8.2%.<\/p>\n