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 Aroundtown (ARNDTN), Sulzer (SUNSW), Banco Itau Chile (ITAUCL), Glarner Kantonalbank (GLRNKB), Barclays (BACR), AMAG Leasing (AMALEA), Crédit Agricole (ACAFP) and Africa Finance (AFRFIN). In the CHF secondary market, we added Helvetia (HBANSW) and Syngenta (SYNNVX). We sold some of our positions held in Swisscom (SCMNVX), Commerzbank (CMZBK), Barry Callebaut (BARY), SPS (SPSNSW), Macquarie (MQGAU) and Banco Bilbao Vizcaya Argentaria (BBVASM).
In the foreign currency primary market, we participated in the new issues of Crédit Agricole Assurances (ACAFP), Athora (ATHORA), Space Exploration Technologies (SPCX) and CPI Property Group. In the secondary segment, we added some Banca Transilvania (TVLRO), Unipol Assicurazioni (UNIIM). We sold some of our positions held in Unicaja Banco (UCAJLN), Adecco (ADENVX), Kohl’s (KSS) and CMA CGM (CMACG).
In terms of sector allocation, we are mainly overweight Real Estate, Insurance Subordinated and Communcations & Technology non-CHF, while underweight in Industrials CHF Seniors and Banking & Financial Services CHF Seniors.
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 result, the total return for both LOF (CH) – Swiss Franc Credit Bond and its benchmark, the SBI® A-BBB, was positive. In this environment, the Fund's relative performance was positive. This was primarily driven by effective sector allocation and strong security selection. At the sector level, the Fund's underweight in Consumer Discretionary contributed positively to relative performance. Conversely, both systematic and discretionary credit hedging strategies detracted from performance, reflecting the tightening in credit spreads over the period. YTD, both absolute and relative returns of the LO Funds (CH)–Swiss Franc Credit Bond Fund are in positive territory 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 credit we maintain an overweight to credit risk, favoring subordinated bank debt, REITs, and select sub-investment-grade telecom issuers.
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