The Fund delivered a positive return in both absolute and relative terms, despite fixed-income volatility.
It mainly benefited from its long positions on the short end of the German yield curve, as bond markets in general and short maturities in particular eased.
Our credit component also made a healthy contribution due to positive carry as interest rates fell. As credit spreads widened, our hedging aimed at reducing exposure to the riskiest corner of the market helped raise performance.
The portfolio’s selection of collateralised loan obligations and exposure to money market instruments continues to have a positive impact.
Global economies’ resilience, with Europe enjoying a soft landing as real income picks up and inflation gradually returns towards target, should enable the ECB to continue step by step with its rate-cutting cycle.
However, given the presence of political and geopolitical risks, the portfolio’s positioning remains balanced.
Our credit allocation is significant, mostly invested in short-term investment grade corporate bonds and CLOs, providing attractive carry.
We are also long on the short end of the German curve, which should benefit from a flight to quality if conditions take a turn for the worse, and from the ECB’s rate cuts.
We are holding on to our credit hedges (iTraxx Xover) as the markets are trading at tight levels at a time of ongoing geopolitical uncertainty.
Lastly, we hold a money market allocation which is a good source of carry with limited risk.
Europe | 76.2 % |
North America | 14.2 % |
Eastern Europe | 8.4 % |
Asia-Pacific | 1.0 % |
Latin America | 0.3 % |
Total % of bonds | 100.0 % |
Market environment
US inflationary pressure eased a little in June, with the rate falling to 3.3%, but momentum remained strong in the labour market and in services where activity picked up again.
At its FOMC meeting, the US Federal Reserve therefore left its interest rates unchanged, with members predicting a cut by the end of this year.
The ECB knocked 25 bps off its key interest rate at its monthly meeting, but reiterated that any future cuts will be data-dependent.
However, risk aversion was high as the political spectrum became more polarised in European elections, causing spreads on the Itraxx Xover index to widen by 23bps.
The dissolution of France’s National Assembly and rise of opposition groups revived fears about public finances, pushing the spread between French and German bond yields above the 80 bps threshold.