Carmignac P. Flexible Bond: Letter from the Fund Managers - Q3 2025

In the third quarter of 2025, Carmignac Portfolio Flexible Bond posted a net performance of +0.96% for the A shareclass, while its benchmark¹ was up +0.17%.

The third quarter of 2025 was mainly marked by the definitive implementation of tariffs in the United States after many months of negotiations with various economic partners. Although the outcome in terms of tax revenue for the United States and the impact on consumer prices is still difficult to estimate, we saw an initial surge in inflation, with the CPI rising to 2.9% at the end of August. This risk did not prevent the US Federal Reserve from implementing a rate cut at its September meeting, favoring the narrative of a slowdown in the job market over that of inflationary risk. While job creation did slow during the quarter, reflecting a degree of caution among US companies, the unemployment rate rose only modestly to 4.3%. On the other hand, PMI indices, like retail sales, pointed to greater optimism after a slowdown in the previous quarter.

In Europe, growth indicators have revived a certain degree of optimism among investors, although there is a sharp divergence between eurozone member countries. It should be noted that France has been particularly sluggish, with the dismissal of Prime Minister François Bayrou's government following a heavy defeat in a vote of confidence in the National Assembly. This political instability, coupled with a deficit that continues to hover above the 5% threshold, has resulted in Fitch downgrading France's sovereign rating to A+. In an environment where inflation appears to be stabilizing above the 2% threshold for both the headline and core indices, the European Central Bank opted for a status quo in its monetary policy during the quarter.
Finally, it should be noted that political events were also tumultuous in Japan, where Prime Minister Ishiba resigned in September amid a challenging economic environment characterized by persistent inflation fueled by a sustained rise in agricultural commodity prices. Against this backdrop, the Bank of Japan continues to lag behind in its monetary normalization cycle, but it has nevertheless initiated a first round of balance sheet reduction through the sale of its ETF portfolio, without changing its key interest rate.

Despite continuing unfavorable geopolitical developments in Eastern Europe and the Middle East, and a lack of visibility on the outcome of trade disputes, investors maintained a strong appetite for risk. This was reflected in a tightening of credit spreads of -15 bp on the Itraxx Xover index during the quarter. Rates showed divergent dynamics on either side of the Atlantic, with an upward trend in the eurozone, where the German 10-year rate rose by +11 bp, in contrast to its US counterpart, which fell by -8 bp over the observation period.

Carmignac P. Flexible Bond significantly outperformed in this mixed environment in both absolute and relative terms, posting a quarterly performance of +0.96% on the A EUR Acc share class, compared with +0.17% for its benchmark. Our inflation-linked instruments contributed half of the fund's performance during the quarter, benefiting from higher-than-expected inflation in the eurozone and a stronger rise in consumer price indices across the Atlantic. On the other hand, our allocation to defensive carry assets continues to deliver sustainable returns within the fund, with notable contributions from the corporate debt, subordinated debt, and emerging market debt segments. Finally, our cautious management of the strategy's sensitivity to interest rates, within a range of [-1.8; 0] during the quarter, enabled the fund to cope with divergent trajectories in the interest rate markets.

We once again made full use of the flexibility offered by our investment mandate to adapt the portfolio to a changing environment. We increased our short position on US rates, particularly at the short end of the yield curve, as pessimism grew in the market. Conversely, we increased our exposure to German debt as the market priced in a scenario of stronger growth in this economic zone. Finally, we increased our exposure to US inflation swaps and diversified our exposure to emerging local debt with a new position in the Czech Republic. At the end of the period, the fund's modified duration stood at -0.1, reflecting our caution regarding the evolution of long-term rates in the eurozone, but also in regions where inflation is more prevalent, such as Japan and the United States. The portfolio posted an embedded yield to maturity of 3.6% with an average rating of BBB, reflecting a strong appetite for hybrid instruments and idiosyncratic selection of credit issuers, while also maintaining 11% protection on the high-yield index to guard against potential valuation shocks in the future.

The current environment is ripe with opportunities for a flexible strategy such as ours. Indeed, a portfolio with significant room for maneuver in terms of managing interest rate sensitivity and bond allocation allows us to capture both excessive optimism and pessimism in market valuations. This is particularly true at present on the US yield curve, where the market is expecting a generous package of five rate cuts in the coming months and is pricing in a scenario of weak growth resulting in a fall in long-term rates, a scenario that we believe is far too pessimistic given the fiscal support provided by the Trump administration and the inflationary risk weighing on the economy due to the introduction of tariffs, as well as migration policies that pose a risk of friction in the labor market in the future.
Conversely, in the eurozone, investors seem to have fully embraced a scenario of sustained growth after several years of marked pessimism. Here again, the market scenario, which does not anticipate any rate cuts in the coming months, offers an asymmetry that seems worth capturing through long positions on German debt. Furthermore, in the current market configuration, to hedge these long positions on the euro yield curve through short positions on issuers with less robust fundamentals, such as France or Italy, whose yield spread could increase in the future given increased competition between different debt issuers at a time of rising deficits. Finally, it remains possible to benefit from the attractiveness of certain bond assets such as inflation-linked instruments, which have clear upside potential while the market continues to show complacency about the ability of different economies to return sustainably to below 2% inflation. Security picking also remains a resilient performance driver, benefiting from dispersion within the credit spectrum, where certain sectors continue to offer excess returns, such as subordinated financial debt. This fragmented universe is therefore above all an opportunity for our strategy, which should benefit from this desynchronization to generate attractive performance.