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.
PORTFOLIO ACTIVITY
Q2 proved to be considerably less volatile than the previous quarter. After spreads widened materially following the US attack on Iran and associated actions at the end of February and beginning of March, we saw a general tightening of spreads throughout the quarter with many bonds now at or even tighter than pre-war levels. Interestingly, throughout this entire period the new-issue market has remained open with demand from investors generally very strong. We added a hybrid issue within the electric sector.
More precisely, we participated in an issue from NextEra Energy (Implied Temperature Rise (ITR) 1.4° vs 2.5°, Carbon Investment Ratio 183 tCO2e vs 1'006 tCO2e). The bond has been issued at par with a 6.00% coupon rate (184 bps spread over US Treasury), which is attractive for an IG-rated (BBB) bond.
PERFORMANCE
In Q2 2026, the Fund modestly outperformed its benchmark on a net-of-fees basis. Sector allocation effect was flat, while security selection was strong, particularly in the banking, non-bank financial and retail-service sectors. The yield curve effect was neutral as the fund is aligned with its benchmark in terms of duration.
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.
SUSTAINABILITY
Five years after launch, our TargetNetZero fixed income strategies demonstrate that investors can align portfolios with climate objectives without sacrificing financial performance. Over this period, the strategies have consistently maintained a structurally lower carbon footprint than their benchmarks and an implied temperature rise below 2.0°C while preserving diversified exposure across sectors. A key element has been looking beyond headline emissions reductions. A portfolio's carbon footprint can decline for technical reasons, for example, when higher-emitting bonds mature or when sector allocations shift, without any real improvement in the underlying companies. A more robust approach isolates these effects and focuses only on changes driven by issuers' own emissions. This distinction is important. It shows whether decarbonisation reflects genuine progress in the real economy or simply portfolio construction. Using such a framework, evidence indicates that portfolios can achieve faster and more meaningful emissions reductions than their benchmarks when driven by active selection of companies that are credibly reducing their carbon footprint. Progress is rarely linear. Decarbonisation pathways differ significantly across sectors, technologies and regions, creating both challenges and investment opportunities. Rather than excluding large parts of the economy, the TargetNetZero approach seeks to identify transition leaders and companies with the potential to improve, supporting a broader and more inclusive transition. Importantly, integrating carbon and temperature considerations has not created a structural performance drag. Financial outcomes continue to be driven primarily by bottom-up credit analysis, with sustainability constraints having only a limited impact. In some cases, favouring companies better positioned for the transition can even help reduce exposure to long-term risks. Five years on, the conclusion is clear: climate-aware fixed income investing is no longer a trade-off. With the right tools and discipline, it can deliver both measurable decarbonisation and financial outcomes, making it an integral part of long-term investment thinking.
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