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 the 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 signalled 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.
In Switzerland, the SNB left its policy rate unchanged at 0% in June, broadly in line with expectations, while reiterating its willingness to intervene in foreign exchange markets to weaken the franc if necessary. The Central Bank also revised its inflation forecasts higher due to rising imported energy costs linked to the Iran conflict.
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.
PORTFOLIO ACTIVITY
Our Ultra Low Duration Strategies again registered net inflows during the month of June, primarily driven by new subscriptions in the EUR fund, which continues to benefit from strong momentum and has seen its AuM increase by over EUR 120 million over the last four months. These inflows come at an opportune time, as rates remain relatively elevated in the 1-3 year segment, with the market still pricing in at least one additional rate hike by the ECB before year-end. In this environment, we selectively extended duration by locking in these higher market-implied rates, while also identifying attractive floating rate opportunities offering wider spreads. We added, for example, a CNP Assurances subordinated bond maturing January 2029 with a call date in October 2028. While the call option (likely to be exercised by the issuer) prevents us from benefitting from a 3.4% yield all the way to maturity, the 3.6% yield to call is still compelling, in our view. We also executed a Banque Internationale à Luxembourg FRN extension trade, switching a May 2027 maturity into an April 2028 one and picking up an additional 85bps of spread. In USD, activity was more contained, although we identified specific opportunities in the secondary market within the 2-3 year bucket, such as an F&G Global Funding private placement at a 5.2% yield. We favoured fixed-rate instruments during the month, maintaining duration close to 0.75 years.
PERFORMANCE
Our Ultra Low Duration strategies delivered solid performance in June. The EUR and CHF funds outperformed their respective benchmarks, while the USD fund performed in line with the SOFR-compounded index. In USD, performance was challenged by an increase in the 1-year swap rate during the middle of the month, following an unexpectedly hawkish tone from Federal Reserve Chairman Kevin Warsh at his first FOMC press conference. This rise in short-term rates created a headwind for the strategy. Nevertheless, the fund matched its benchmark's performance, supported by its allocation to floating-rate notes which deliver higher carry as rates rise. In EUR, the 1-year swap rate moved higher ahead of the ECB meeting before retracing and ending the month broadly unchanged. Against this backdrop, the fund outperformed the ESTR compounded index by 10 bps during the month. Despite the rate sell-off experienced in March, the strategy achieved a net year-to-date return of 1.14% (non-annualized) at the halfway point of the year.
OUTLOOK
Looking ahead, the outlook for Ultra Low Duration strategies remains constructive, as front-end rates across major currencies continue to offer attractive entry points despite uncertainty regarding the path of central bank policy. While markets still price relatively restrictive policy in both the US and Europe, the potential for fewer rate hikes than expected could support performance, particularly given the strategies’ low duration profile. In EUR and USD, the current environment continues to present opportunities to lock in yields at appealing levels while maintaining flexibility through floating-rate exposure. Overall, the strategies remain well positioned, aiming to maximise returns on cash while preserving liquidity and diversification benefits in an evolving macroeconomic landscape.
condividi.