MACRO AND MARKET REVIEW
June proved to be another constructive month for fixed income investors, with improvements in the Middle-East providing respite. Government bond markets continued the recovery from their war-induced volatility, while credit moved marginally wider on the month despite improving sentiment around energy markets. Euro-denominated assets again outperformed many USD counterparts, supported by stronger duration performance in lieu of a softening inflation outlook and a retracement in energy prices.
The key development during the month was the signing of a Memorandum of Understanding (MoU) between Iran and the US, opening a 60-day ceasefire agreement to allow for further negotiations towards a longer-term peace agreement. Following the MoU, vessel traffic partially resumed through the Strait of Hormuz and oil markets responded swiftly, as brent crude fell sharply back towards pre-conflict levels. While negotiations remain ongoing and sporadic security incidents continue to highlight the fragility of the situation, markets increasingly viewed the worst-case energy supply scenarios as less likely.
The moderation in energy prices was particularly important from a macroeconomic perspective. Inflation concerns had dominated market discussions throughout the second quarter, but June data provided the first signs that the energy shock may not spread broadly as had been feared. Eurozone headline inflation slowed to 2.8% from 3.2% in May, while core inflation also eased. Across the Atlantic US inflation was similarly well behaved, showing little sign of broader pass through. Ultimately, although price pressures remain above central bank targets, the direction of travel was encouraging and helped support a broader rally across duration markets, particularly in Europe.
Central banks nevertheless maintained a cautious stance. The ECB raised its deposit rate by 25bps to 2.25%, citing continued inflation risks stemming from the energy shock and a desire to keep inflation expectations anchored. The Federal Reserve left rates unchanged, with policymakers signalling concern that inflation remains above target alongside a still-resilient economy. Despite the progress on the war and inflation front, both decisions emphasised that inflation concerns still trump growth concerns in eyes of central banks.
June also marked the first Federal Reserve meeting under new Chair Kevin Warsh. While rates were left unchanged, the Fed adopted a more hawkish tone, removing language that had previously pointed towards eventual rate cuts. Warsh also signaled a reduced emphasis on forward guidance, declining to participate in the Fed's traditional "dot plot" projections and stressing a more data-dependent approach to policy. The move away from explicit forward guidance will likely lead to more volatility in front end US rates in the coming years, a trend that is likely to heavily shape future fixed income performance.
TOP DOWN ACTIVITIES
On June 19th, we have decided to adjust our tactical asset allocation by increasing government bond exposure from 27.5% to 30.0%, moving from a 2.5% underweight position to neutral. At the same time, we are reducing cash holdings from 5.0% to 2.5%, shifting from neutral to a 2.5% underweight position.
Progress in discussions between the United States and Iran has helped alleviate geopolitical tensions and reduce inflation concerns associated with higher oil prices. At the same time, markets have significantly repriced the expected path of monetary policy, with current valuations now reflecting a meaningful amount of additional tightening, approximately two further rate hikes in both the US and Europe.
As a result, government bond valuations have become more attractive, while the broader risk environment has improved. In addition, seasonal factors appear supportive as we approach the summer period, reinforcing the case for increasing government bond exposure at the expense of cash.
BOTTOM UP ACTIVITIES
GOVERNMENT POCKET
In June, we maintained the strategic long-duration bias held since the sharp repricing of global interest rates following the energy price shock. At the same time, we took partial profits on some positions, particularly in the Eurozone, using periods of headline-driven volatility to trim exposure, notably around the signing of the Memorandum of Understanding between the United States and Iran.
INVESTMENT GRADE POCKET
The constructive tone in Financial markets continued through June. We took the opportunity to reduce our holdings in names and issues that we felt were trading at very tight spread levels including Belgian Insurance company, Ageas, contract clinical research service provide ICON, Swiss recruitment services company, Adecco and Italian wireless tower operator Infrastrutture Wireless Italiane.
The new issue market remained active ahead of the traditionally quieter summer months of July & August. We recycled some of the proceeds from the sales above into new issues including:
Vittoria Assicurazioni; a diversified Italian insurance group with operations spanning both life and non-life insurance, supported by a strong capital position and a conservative financial profile. As an infrequent issuer, Vittoria came to market with a relatively small, below-benchmark transaction but left a meaningful new issue concession on offer, creating an attractive entry point. We therefore added exposure to a solid and well-capitalised European insurer, while benefiting from an attractive yield within the EUR Tier 2 market.
OTP Bank Nyrt, the largest bank in Hungary, has diversified geographically across Central & Eastern Europe following a number of acquisitions. Hungary now accounts for only 33% of loans & 35% of deposits. OTP has a strong earnings profile (20%+ ROE) and capital ratio (CET1 ratio 17.5% vs 11.1% requirement), along with decent asset quality (stage 3 ratio 3.4%).
Space Exploration Technologies Corp.'s (SpaceX) is the world's leading launch provider and operator of Starlink, the largest low-Earth orbit broadband constellation. Its 2026 acquisition of xAI added frontier AI model development, large-scale compute infrastructure, and the X social media platform. We participated in the new issue as we think spreads were attractive due to the company's entrenched competitive position in the space and satellite segments, while the company could also more efficiently manage capex in the AI segment, if need be.
We increased exposure to leading US electric utility NextEra Energy through the new IG hybrid issue in USD. Bonds were issued at attractive levels for a company with a strong focus on renewables and low-risk regulated operations.
HIGH YIELD POCKET
Similar to the IG primary market, the HY segment was also active. In this environment, we took profits and allocated proceeds to the following new issue:
CoreWeave (CRWV) provides specialized AI cloud infrastructure services, notably high-performance computing (HPC) via a GPU-as-a-service model, as well as advanced networking, software services, and storage. While CoreWeave's currently elevated capital expenditures and resulting negative free cash flow may appear daunting on a consolidated basis, we believe actual credit risks are mitigated by several factors. In particular: (1) the company's revenue visibility based on its backlog of take-or-pay contracts; (2) a success-based capital expenditure model, whereby CoreWeave invests in technology infrastructure only against signed contracts and once the leased, powered data centre shell has been delivered by the lessor; and (3) strong cash operating margins, which we believe support a model in which debt incurred to fund capital expenditures can be amortised within the initial contract term. As a result, we participated in the new issue, as we view the risk-reward profile as attractive.
Innomotics (DYNNEW); we view its bond as an attractive opportunity to gain exposure to a market-leading industrial motors and drives business at a yield premium that, in our view, more than compensates for near-term cyclical weakness and elevated leverage. Despite pressure from subdued industrial demand, project delays and ongoing carve-out execution risks, the company's diversified end-market exposure, growing service revenues, strong cash generation and clear deleveraging and cost-saving strategy provide confidence in the medium-term credit trajectory.
These new holdings were funded by taking profits in selected positions, such as Standard Building Solutions, a US-based company in the building materials sector.
PERFORMANCE
On a year-to-date basis, the Fund has outperformed the Bloomberg Global Aggregate Index.
Strategic Asset Allocation (SAA) made a positive contribution to performance since the beginning of the year. In March, following the outbreak of the Middle East conflict, all asset segments posted negative returns. This trend reversed, with in June nearly all segments returning to positive territory with investment-grade corporates, high yield, and sovereign emerging-market bonds leading the recovery while the government segment posting slightly negative performance.
Tactical Asset Allocation (TAA) had a slightly positive overall impact. Contributions across segments were broadly balanced, and no tactical positioning materially drove relative performance.
Portfolio Construction (PC) also added value. Security selection contributed positively, driven by favorable selection effects within investment-grade securities.
OUTLOOK
All in all, in the face of more geopolitical developments fixed income delivered another steady month of strong performance. Further easing of energy concerns and softer inflation data would support a more constructive backdrop for government bonds moving forward, while strong corporate fundamentals and sustained investor demand continued to underpin credit markets. Although risks remain and vigilance is still warranted, the asset class has navigated recent volatility well, leaving credit attractive from a carry perspective and the outlook for duration more balanced than at the start of the month.
teilen.