The median 1 month performance in the YieldReport survey of global bond funds was -0.30% (previously -0.24%) while the median return over the last 12 months was 2.50% (previously 4.11%).
February turned out to be another tough month for global bond funds generally, just as January had been. Despite lower yields in Europe, managers struggled as U.S. yields increased substantially. Life was a little easier for funds with an unhedged currency exposures as the Aussie dollar weakened against the USD, euro, sterling and yen but few appear to have benefitted. 10 of 43 funds in the YieldReport survey produced positive returns for the month.
Yields in advanced-economy bond markets finished February a little lower in Europe and significantly higher in the U.S. U.S. 2 year bond yields rose by 10bps to 2.24%, 10 year bond yields increased by 15bps to 2.86% and U.S. 30 year bonds gained 19bps to 3.13%. In European markets, German 10 year bond yields lost 4bps to 0.65%, French 10 year yields decreased by 5bps to 0.92% and U.K 10 year gilts slipped 1bps to 1.50%. Italian bond yields stayed with the pack and lost 4bps to 1.97%.
Not long into the month, equity markets found themselves in turmoil. A strong U.S economy, tax cuts and expectations of higher budget deficits and the announcement of a $1 trillion 2018 borrowing programme by the U.S. Treasury fed inflation fears and expectations of higher bond yields. As equities markets around the globe rediscovered volatility, government bonds found favour with investors. However, it did not start off that way. Australian bond markets reacted to U.S. payrolls figures with a sharp jump in yields only to activate the “flight to safety” switch a day later. Yields then fell back to their starting points. U.S. markets faced a dilemma, however, as inflation expectations increased and 10 year yields finished that week at a high.
Towards the end of the month bond yields fell away. The release of the FOMC January minutes initially sent yields higher but they then dropped away after speeches by various Fed members reminded everyone rate increases would be gradual. European markets focussed on the minutes from the ECB’s January meeting but, after they were published, the contents were described as “benign” and not indicative of any great change in the ECB’s expected path of future monetary policy.
The best performing global fund for the month in the YieldReport survey was the T. Rowe Price Dynamic Global Bond fund. Its return of 0.96% follows on from a solid performance in the January survey (+0.42%) and a mediocre return in December (+0.01%). The second-highest return of +0.28% was produced by the Kapstream Wholesale Absolute Return Income Fund and the third highest result came from the Alpha Diversified Income Fund (+0.25%).
In terms of fund performance for the twelve months to February 2018, the Legg Mason Western Asset Macro Opportunities Bond Fund produced the highest return (9.71%, previous month: 13.24%) and thus retained its top position in the survey. At the time, this fund had an effective duration of 6.4 years and the average credit rating of its 418 securities is “A” (previous month: A-). Government securities accounted for 43.9% (previous month: 35.5%) of the fund, emerging market securities 22.7% (previous: 23.4%), investment-grade corporate debt 14.6% (14.5%) and cash and “other securities” accounted for 5.5% (13.6%). High yield 8.1% (7.6%) and asset-backed securities 5.2% (5.4%) accounted for the balance.
GLOBAL BOND FUNDS
| GLOBAL BOND FUNDS | ASX mFund | 1m (%) | 3m (%) | 1y (%) | 3y (%) | 5y (%) |
|---|---|---|---|---|---|---|
| Advance International Fixed Interest Multi-Blend | -0.32 | -0.55 | 1.55 | 0.99 | 2.50 | |
| Alpha Diversified Income | mFund | 0.25 | -0.46 | 1.25 | 1.83 | 2.67 |
| AMP Future Directions International Bond Fund | -0.45 | -1.01 | 1.28 | 1.58 | 3.28 | |
| AMP Capital International Bond | -0.40 | -0.87 | 1.82 | 2.11 | 3.82 | |
| ANZ-CFS Global Credit Income EF | -0.24 | 0.58 | 3.07 | 2.84 | 3.36 | |
| Bentham Professional Global Income | mFund | 0.18 | 2.37 | 8.19 | 6.15 | 6.92 |
| Bentham Wholesale High Yield | mFund | -0.93 | -0.25 | 5.33 | 6.55 | 7.22 |
| Bentham Syndicated Loan ASX Class | mFund | 0.04 | 1.37 | 5.92 | 6.18 | 6.50 |
| Kapstream Wholesale Absolute Return Income | mFund | 0.28 | 0.81 | 3.36 | 2.90 | 3.51 |
| BlackRock Monthly Income | -0.45 | 1.00 | 5.19 | 3.90 | 5.33 | |
| BlackRock Wholesale International Bond | -0.59 | -0.62 | 2.27 | 2.91 | 4.78 | |
| BT Global Fixed Interest Wholesale | -0.25 | -0.93 | 0.92 | 1.72 | 3.75 | |
| BT Institutional Enhanced Global Fixed Interest | -0.23 | -0.92 | 1.06 | 1.90 | 3.93 | |
| CFS Wholesale Global Bond | -0.37 | -0.82 | 1.07 | 1.92 | 3.70 | |
| CFS Wholesale Global Corporate Bond | -1.12 | -0.91 | 2.87 | 3.79 | 5.27 | |
| Dimensional Five-Year Diversified Fixed Interest | -0.03 | -0.69 | 1.07 | 2.68 | 3.23 | |
| Dimensional Global Bond Trust | -0.20 | -1.19 | 1.33 | 3.23 | ||
| Dimensional Two-Year Diversified Fixed Interest | -0.01 | -0.15 | 1.02 | 1.97 | 2.38 | |
| Franklin Templeton Global Aggregate Bd W | 0.05 | -0.57 | 1.81 | 1.05 | ||
| Franklin Templeton Multisector Bond I | -0.52 | -0.10 | 2.50 | 1.98 | 3.02 | |
| GAM Absolute Return Bond (AU) | 0.06 | 1.07 | 4.08 | 4.30 | 3.00 | |
| Invesco Wholesale Senior Secured Income | mFund | 0.20 | 1.51 | 4.34 | 5.13 | 4.32 |
| Legg Mason Brandywine Global Opp Fixed Income A | mFund | -1.03 | 1.51 | 4.98 | 2.55 | 5.46 |
| Legg Mason Brandywine Global Fixed Income A | -0.78 | 2.12 | 5.54 | 2.14 | 5.22 | |
| Legg Mason Western Asset Global Bond Fund | -1.11 | -1.06 | 4.31 | n/a | n/a | |
| Legg Mason Western Asset Macro Opportunities Bond Fund | -2.00 | -0.62 | 9.71 | n/a | n/a | |
| Macquarie Global Bond | -0.10 | -0.74 | 0.70 | 1.45 | 3.74 | |
| Macquarie Global Income Opportunities Fd | -0.34 | 0.06 | 3.79 | 2.93 | 3.43 | |
| Mercer Global Credit Fund | -1.00 | -1.02 | 2.45 | 3.27 | 4.84 | |
| Mercer Global Sovereign Bond Fund | 0.21 | -0.38 | 3.64 | 3.48 | 5.38 | |
| Nikko AM International Bond | -0.06 | -1.00 | 0.60 | 2.53 | 4.40 | |
| Omega Global Corporate Bond | -0.70 | -1.04 | 2.09 | 3.05 | 3.50 | |
| PIMCO Global Bond Wholesale | mFund | -0.43 | -0.67 | 2.96 | 3.81 | 5.04 |
| PIMCO Global Credi Wholesale | mFund | -0.63 | -1.08 | 2.52 | 3.45 | 4.66 |
| PIMCO Diversified Fixed Interest Wholesale | mFund | -0.07 | -0.61 | 2.92 | 3.09 | 4.46 |
| PIMCO Unconstrained Bond Wholesale | mFund | -0.17 | 0.18 | 3.53 | 3.37 | N/A |
| State Street SSgA Global Fixed Income | 0.04 | -0.61 | 1.57 | 2.70 | 3.98 | |
| T.Rowe Price Dynamic Global Bond Fund | 0.96 | 1.34 | 1.19 | 4.47 | ||
| Templeton Global Bond Plus W | -0.42 | -0.27 | 1.45 | 0.85 | 1.82 | |
| UBS Global Credit Fund | -1.07 | -1.02 | 3.12 | 3.55 | 4.95 | |
| UBS International Bond | -0.30 | -0.66 | 2.42 | 3.00 | 4.32 | |
| Vanguard International Credit Securities Index Hdg | -0.73 | -0.99 | 2.54 | 3.21 | 4.46 | |
| Vanguard International Fixed Interest Index Hdg | -0.01 | -0.53 | 1.52 | 2.83 | 4.46 |
*End of February 2018. Returns in AUD after fees.