Stockholm (HedgeNordic) – Higher than expected inflation readings in a number of wealthy economies and signals from several central banks about sooner than expected policy tightening caused increased volatility in bond markets at the end of last month with sharply higher short-term rates. Brummer & Partners-backed Frost, a fixed-income relative value fund focused on Scandinavian fixed-income markets, was heavily impacted by the bond market turmoil, with the fund booking a loss of 17.7 percent for October.

Frost suffered from “the recent weeks’ surge in Swedish short term interest rates and flattening of the yield curve,” according to a monthly commentary by Brummer & Partners. “A catalyst for the extreme moves, which spilled over to EUR and SEK rates, was Bank of England’s hawkish comments on the back of rising inflation expectations,” the commentary adds. “In Sweden, there is now a significant divergence between the Riksbank’s communicated trajectory for short term interest rates and what the market is pricing in.”

“Frost had its worst month since inception, mainly suffering from the recent weeks’ surge in Swedish short term interest rates and flattening of the yield curve.”

Explaining the increased volatility in the Swedish bond market, a team at SEB writes that “market expectations for Riksbank’s rate hikes, which have gradually increased over the last 5-6 months, have taken a large step higher.” The SEB team goes on to say that “we believe stop losses have exaggerated the movements and even though upside risks to inflation are increasing we predict core inflation to remain below the Riksbank’s forecast also in October.” According to the team at SEB, “the Riksbank is unlikely to turn hawkish in the upcoming Monetary Policy report on 25 November. Provided that the international situation calms down, we think that swap rates will reverse parts of the recent upturn.”

“The fact that BMS finished the month in positive territory is a testament to the strength of the diversification in BMS’s portfolio.”

Despite Frost’s monthly loss of 17.7 percent, Brummer Multi-Strategy (BMS), the multi-strategy fund investing in the single-strategy hedge funds under Brummer & Partners’ umbrella, edged up 0.2 percent last month. “Frost’s negative contribution to BMS’s return is however limited since the allocation to Frost has been kept low,” writes Brummer & Partners in the monthly commentary. Brummer Multi-Strategy had 4.5 percent of its SEK 35.8 billion in assets under management allocated to Frost at the end of September. “The fact that BMS finished the month in positive territory is a testament to the strength of the diversification in BMS’s portfolio.” During October, trend-following strategies Florin Court and Lynx were significant positive contributors, both capitalizing on bond market volatility.

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