The following commentary was recently published in the Ladder Select Bond Fund Semi-Annual Letter to Shareholders, which can be accessed here.
Over the period, the Treasury curve rallied aggressively from 3-month bills through the 30-year bond with intermediate and long dated maturities rallying over 100bps or more.
The result was a flatter curve where the 2-year / 10-year Treasury closed negative on August 22nd for the first time since 2007 and was inverted 1 basis point at the end of the period after beginning the period at a positive 20 basis points. The relative moves across the Treasury curve during the period were the following: the 3-month Treasury bill yield was 45 basis points lower closing at 1.98%; the 2-year Treasury yield was 100 basis points lower closing at 1.51%; the 5-year Treasury yield decreased by 112 basis points closing at 1.39%; the 10-year Treasury yield decreased by 122 basis points closing at 1.50%; and the 30-year Treasury yield decreased by 112 basis points closing at 1.96%.
The U.S. trade war with China again dominated the headlines as trade negotiations were ‘on again’ and then ‘off again’. The result of this trade war was continuing supply line disruptions as tariffs on both sides were increased and a global growth slowdown was led by the Eurozone, which in September reported its worst Purchasing Managers Index (“PMI”) number in 7 years. The index fell to an 83-month low of 45.6 in September, down from 47 in August. Economists polled by FactSet had expected a 47.3 reading, (MarketWatch Sept 23, 2019) and any reading below 50 indicates contraction or worsening conditions. German manufacturing PMI fell to 41.4 in September from 43.5, the worst reading in more than a decade. The U.S. economy continues to be held up by the consumer, with unemployment at historical lows, Consumer Price Index increasing to 2.4% Year over Year and the Atlanta Fed forecasting a slowing Q3 US GDP at 1.9%.
U.S. Treasury rates on the long end approached all time low yields and the front end of the curve continued to be, in our opinion, an attractive ‘risk adjusted’ short duration carry trade. Global growth has slowed domestically and abroad and in some regions may be contracting and soon be defined as recessionary. It is probable that the longest U.S economic expansion in history comes to an end at some time in 2020.
Given this investment landscape and the expanding geo-political and global market uncertainties, the Fund will continue to focus on its core investment strategy of generating income with an even more prudent focus on capital preservation. We continue to be focused on credit selection ‘tail risk’ in this ever slowing and uncertain global economy while looking for resilient credit profiles and attractive cash flows with a minimal amount of potential market valuation delta. Duration remains a primary focus; over the past year the Fund has leaned to the short end of its 2 to 7yr expected window and that is expected to continue. On behalf of everyone at Ladder Capital Asset Management, we thank you for investing with us. We look forward to the Fund’s continued success as we approach 2020.
The Letter to Shareholders seeks to describe some of the Adviser’s current opinions and views of the financial markets. Although the Adviser believes it has a reasonable basis for any opinions or views expressed, actual results may differ, sometimes significantly so, from those expected or expressed. The securities held by the Fund that are discussed in the Letter to Shareholders were held during the period covered by this Report. They do not comprise the entire investment portfolio of the Fund, may be sold at any time, and may no longer be held by the Fund. For a complete list of securities held by the Fund as of August 31, 2019, please see the Schedule of Investments section of the semi-annual report. The opinions of the Fund’s adviser with respect to those securities may change at any time.
Statements in the Letter to Shareholders that reflect projections or expectations for future financial or economic performance of the Fund and the market in general and statements of the Fund’s plans and objectives for future operations are forward-looking statements. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed, or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to factors noted with such forward-looking statements, include, without limitation, general economic conditions, such as inflation, recession, and interest rates. Past performance is not a guarantee of future results.