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. The Swiss National Bank (SNB) set itself apart from other major central banks at its June meeting by maintaining its expansionary monetary policy stance. It left monetary policy unchanged at 0% and reaffirmed its ‘increased readiness’ to intervene in the foreign exchange market to stabilise the Swiss franc.
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
In the CHF-denominated primary market, we participated in the new issues of Itau Chile (ITAUCL), Sulzer (SUNSW), Allreal (ALLNSW) and Crédit Agricole (ACAFP). In the CHF secondary market, we added Met Life (MET) and sold some positions held in Kraftwerke Linth-Limmern (KWLILI), Crédit Agricole (ACAFP), Corporacion Andina de Fomento (CAF), North American Development Bank (NADB), UBS (UBS), ZKB (ZKB), Julius Baer (BAER) and Landesbank Baden-Württemberg (LBBW).
In terms of sector allocation, we are overweight Banking & Financial Services and Insurance, while underweight Treasuries and covered bonds.
In terms of duration, we remain slightly longer than the benchmark.
PERFORMANCE
In June, the CHF government bond curve bull-flattened, with yields rising at the short end and declining in the belly and at the long end. Over the same period, CHF A and BBB credit spreads slightly tightened, while AAA and AA credit spreads were stable. From a sector perspective, the tightening was broadly uniform, with spreads compressing by around 1-2 bps across sectors.
As a consequence, total returns were positive for both the LOF (CH)-Swiss Franc High Grade Bond fund and its benchmark, the SBI® AAA-AA Index. In this environment, the Fund delivered positive relative performance. This was primarily attributable to favourable yield-curve positioning, which more than offset the small negative contributions from both sector allocation and security selection. At the sector level, the overweight position in Financials contributed positively to the fund's performance. At the sector level, the overweight position in Financials contributed positively to the fund's performance. Conversely, the Fund’s underweight exposure to Treasury detracted from relative performance. YTD, both absolute and relative returns of the LOF (CH) – Swiss Franc High Grade Bond are positive on a gross-of-fees basis.
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.
The SNB remains in a relatively comfortable position, and we do not expect further policy adjustments in the near term. However, recent communication points to a gradual shift in policy bias, suggesting moderately higher rates over the medium term. Such a development would reflect underlying economic strength and support confidence in Switzerland’s growth outlook. In terms of duration positioning, we prefer the 5–10 year segment, with a neutral stance beyond 10 years. In the High Grade (AAA–AA) segment we are overweight AA-rated public sector issuers (e.g. cantonal banks, hospitals), funded through an underweight in Swiss government bonds.
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