The Fund closed 1H 2026 with YTD returns of +4.82% (USD N Accumulation share class) versus +4.01% for the JACI HY benchmark. The Fund's return also compared favourably with the US Corporate HY market, which returned +1.96% in 1H 2026 (Bloomberg US Corporate HY Index).
USD credit markets softened once again owing to the widening of US Treasury yields, as Fed Governor Kevin Warsh stated at his first FOMC meeting that all policy options, including both rate hikes and cuts, remain on the table. This led to a modest reversal of the recent steepening in the US Treasury curve, resulting in a slight bear-flattening move. UST 2Y and 5Y yields moved wider to 4.23% and 4.33%, respectively, versus the current overnight Fed rate of 3.65%. This is essentially pricing in two 25 bps rate hikes by the Fed before rates are eventually cut again. The long end of the UST curve has remained relatively range-bound, as any additional rate hikes would further anchor the 10Y and 30Y segments and help contain both growth and inflation. This price action, together with the continued friction between the US and Iran over the Strait of Hormuz, has caused all-in yields across Asia/EM USD bonds to increase over the past few weeks.
Meanwhile, we continued to actively manage the Fund for attractive relative value opportunities. We completely exited the older Vedanta bonds that were subject to the consent and tender exercise and participated in the new Vedanta 7-year and 10-year bonds at coupons of 7.375% and 7.75%, respectively. We also added the new India Infoline (large non-bank lender) 2030 senior secured bonds at a yield of 7.75%. We believe this pricing is highly attractive for senior secured bonds with strong roll-down potential. Additionally, we took a position in Axis Bank, India's third-largest private sector bank with a market capitalisation of approximately USD 43bn, through its new 5-year AT1 bonds at 6.875%, which we viewed as attractively priced.
Also in India, we added a new special situations issuer, Shapoorji Pallonji ("SP"), through its security financing entity. The entity is a 150-year-old group in India and closely linked to the esteemed Tata group. The USD bonds issued have a three-year maturity and are callable in one year at a yield of 14.5%, secured by a portion of Tata & Sons shares with a current issuer loan-to-value (LTV) of less than 30%. The company is working with privately held Tata & Sons to reduce its stake, which would allow this debt to be repurchased and refinanced at lower levels. Our position currently represents 0.75% of the Fund.
Elsewhere in Asia, we also bought into the new issue from Philippine Airlines, purchasing the 2031 bonds at an 8.0% yield with a Fund weight of 0.7%. The airline is currently lightly levered, with strong operations and profitability from trunk routes between the Philippines and the US. It is currently benefiting from improved fleet planning and structurally lower labour costs than its competitors on its key routes. We estimate that EBITDA will continue to grow over the next two to three years, supported by strong product demand in the region, which should further reduce the airline's leverage.
As we enter 2H 2026, the Fund is well positioned with a yield-to-worst (YTW) of approximately 9.1%, a modest duration of 3.4 years, and an average portfolio rating of BB-.
Looking ahead, we believe the resolution of the Iran conflict will provide a further boost to Asia and EM HY USD credit markets, and we aim to benefit from attractive valuations and improving corporate fundamentals in 2H 2026. The large redemption schedule of Asia USD bonds is also expected to return significant capital to investors, which will likely be redeployed into the asset class and provide further support to market technicals. Our Fund remains well positioned to benefit from supportive bid-side technicals, while capturing both attractive carry and potential yield compression opportunities in 2H 2026.
We appreciate your support and please do not hesitate to contact us with any questions.
DHIRAJ BAJAJ
On behalf of LOIM Asia Fixed Income team
condividi.