Fixed Income Commentary: As at December 31, 2023

The fourth quarter of 2023 saw extreme volatility across asset classes with a selloff in October followed by a significant rally in November and December. Demonstrating continued correlation, interest rates were the primary driver of the cross-asset price changes with the US 10 Year Treasury yield trading in a massive 129 basis point range. The “higher for longer” narrative quickly shifted as inflation data improved and central bank communications began to hint at a quicker path to rate cuts in 2024.

With over 6 rate cuts priced in for 2024 and continued resilience in US economic data, we see a fundamental disconnect – ie we may need to see a deterioration in the data to actually see these cuts materialize. Another risk is that the “Powell Pivot” actually re-ignites some inflationary pressures with financial conditions easing significantly.

For the 10-year part of the yield curve, after the large rally we see challenging risk/reward heading into 2024 given the supply/demand picture ahead with fiscal deficits, ongoing quantitative tightening, and several structural elements of inflation. This could lead to a steeper curve and perhaps rate cuts at the front end don’t translate into further gains for long duration bonds.

With all-in yields on corporate bonds still near cycle highs and bond prices still at significant discounts to par, we remain constructive on credit. However, we are highly attentive to credit spreads and expensive valuations in certain parts of the credit market. We see outstanding risk/reward in short-mid duration high quality corporate bonds at a discount to par. In addition, our team continues to focus on finding uncorrelated special situation investments that can provide attractive yield and capital gain potential. We also took advantage of the rally in risk assets to rebalance hedges given macroeconomic uncertainty and expensive valuations.

The highly correlated sell-off and subsequent rally serve as a reminder to investors of how much interest rate sensitivity exists within most portfolios and across most assets in the current environment. We believe this creates an opportunity for investors to replace traditional long-only strategies with alternative strategies that generally have lower correlations to interest rates.

 

1M (%) 3M (%) 6M (%) 1YR* (%) 3YR* (%) 5YR* (%) Since Inception* (%)
Picton Mahoney Fortified Income Fund (Class F) 1.25 3.17 3.64 7.08 1.52 3.55 4.88
(Oct. 29, 2015)

Blended Benchmark1 3.37 6.48 6.63 10.99 -0.31 3.43 3.80
(Oct. 29, 2015)

Picton Mahoney Fortified Income Alternative Fund (Class F) 1.36 3.13 3.51 6.79 2.34 4.30
(July 10, 2019)

Blended Benchmark1 3.37 6.48 6.63 10.99 -0.31 1.82
(July 10, 2019)

 

(*) refers to average annualized performance.
1 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD)

Related Content

Alpha Strategy Commentary: As at September 30, 2024

Alpha Strategy Commentary: As at September 30, 2024

The Picton Mahoney Fortified Alpha Alternative Fund Class F (“the Fortified Alpha Fund”) produced a return of 2.95% in the third quarter of 2024. The funds continue to provide returns independent of...

This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 11, 2024

It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.

Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.

There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.

This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.

© 2024 Picton Mahoney Asset Management. All rights reserved.