Acre Fixed Income Note Sep 2020 - Acre Capital

Performance for Sep’20

The aggregated Acre fixed income portfolios across all clients are up +0.8% in the month of Sep 2020. YTD performance stands at +10.0% vs the IBoxx Asia High Yield Index at +1.1%.

 

Sep 2020 Key Event: China Controls on Property Developers’ Use of Leverage

As warned in last month’s note, September saw the risks of investing in Chinese developer bonds playing out with the Evergrande curve falling by 450-700bps due to concerns of refinancing and various off-balance sheet liabilities coming due. While China’s policy of controlling developers’ use of leverage is credit positive in the long run, there are short term pressures on sentiment and margins that the market has to digest first. We have been selective on quality China developer names and have actually seen those rally as the market was falling (Figure 1). This explains part of the outperformance vs competing funds who are compelled to hold lower quality bonds to track the benchmark. In contrast, we are able to differ from this and deliver a better risk/return profile.

Figure 1: Higher quality bonds (Shimao) rallied while lower quality bonds (Evergrande) fell -7%

Finding Yield in RMB fixed income

With the hunt for yield becoming more intense and the continued depreciation of the USD, it makes sense to now into RMB-denominated fixed income. Firstly, the yield pickup between RMB bonds and USD ones would be at least 2.4% (Figure 2). Quasi-sovereigns RMB bonds would give an attractive gross yield of about 4-5%. Moreover, the RMB has been strengthening against the USD since June’20 (Figure 3) partly due to the positive interest rate differential. The USD CNY could go to 6.20 which would mean an FX gain as well.

Figure 2: China 10Y yield at 3.19% vs US 10Y yield at 0.77%. Pickup of +2.4%

Figure 3: RMB strengthening against the USD since June’20. Could potentially go to 6.20

Overall Positioning

No change to our fairly defensive stance, with overall duration ~5 years and yield to maturity at 5% with all clients’ funds fully deployed. There are rotation opportunities into RMB bonds which I am in the process of executing.

Happy to discuss more over a call, coffee or in the office if you’re interested to know more.

 

Regards,

Vincent

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