August 2023 Commentary
The month of August began with an announcement from Fitch Ratings that it would downgrade its U.S. rating from AAA to AA+, which was attributed to fiscal deterioration. U.S. Treasuries, as represented by the iBoxx $ Treasuries, fell 0.60% in August. Given that backdrop and the U.S. Federal Reserve reiterating its commitment to possible further interest rate increases to bring inflation down to its 2% target, the S&P 500®’s five-month positive run finally gave way to a decline of 1.77%, marking August as its first monthly loss since February 2023. This brought the YTD return of the iBoxx $ Treasuries to 0.86% and the S&P 500 to 17.40%.
In contrast to U.S. inflation concerns, falling consumer prices and other weakening economic indicators in China point to a deflationary environment in the country. On top of that, China’s Real Estate investors were dealt another blow as China’s largest private real estate developer, Country Garden, missed interest payments on two of its U.S. dollar bonds and appealed for an extension on its onshore private bond repayment. In an effort to stimulate the economy and property market, the People’s Bank of China eased policy rates by 10 bps for the second time in three months, relaxed mortgage requirements and lowered borrowing rates for homebuyers.
The overall index retreated 1.05% in August, weighed down by the high yield segment, which dropped 2.84%. Except for the higher quality bonds with shorter time to maturity, almost all other rating and maturity segments were in the red this month. The worst-performing segment was BB 7-10 Years, which is primarily made up of Country Garden bonds.
Other than South Korea (up 0.19%), all other markets that comprise the top seven in the index posted negative returns in August. Hong Kong (down 2.42%), Indonesia (down 1.59%) and the Philippines (down 1.24%) were the worst-performing markets. Spreads across all top seven markets widened—except for South Korea—while duration across all top seven markets shortened.
