Carmignac Portfolio Sécurité: Letter from the Fund Managers - Q3 2026

In the third quarter of 2026, Carmignac Sécurité posted a performance of -1.2%, compared with -0.7% for its reference indicator¹, bringing year-to-date performance to -0.2% versus -0.2% for the reference indicator¹.

The third quarter of 2026 offered little respite for bond investors, as escalating geopolitical tensions, sharply higher energy prices and resilient growth brought inflation firmly back into focus. Renewed US–Iran strikes and disruptions to Saudi energy infrastructure reversed the previous quarter’s relief, triggering a pronounced sovereign bond sell-off and a significant reassessment of monetary policy expectations. Brent crude jumped 42.0% over the quarter to above USD 100 per barrel, while European natural gas futures climbed 66.6%.

The renewed inflationary impulse was increasingly visible in the data. In the United States, headline CPI stood at 3.4% year-on-year in August, while the Fed’s preferred core PCE measure remained elevated at 3.0%. In the euro area, headline inflation accelerated from 3.2% in August to 3.8% in September, reinforcing concerns that price pressures were proving persistent.

Economic activity nevertheless displayed notable resilience. September’s flash composite PMIs reached a five-year high in the United States and a three-year high in the euro area, giving central banks greater room to focus on renewed inflation pressures. In Europe, the ECB upgraded its growth projections to 0.9% for 2026, from 0.8% previously, and 1.4% for 2027, from 1.2%, underlining the economy’s greater-than-expected resilience.

Against this backdrop, central banks adopted a distinctly hawkish stance. Both the Fed and the ECB raised rates by 25 basis points in September. The Fed’s first hike since 2023 was accompanied by projections signalling another increase by year-end, while the ECB stressed that inflation was set to remain well above target for an extended period.

The bond sell-off pushed key sovereign yields and spreads to levels not seen in well over a decade. The US 10-year Treasury yield increased by 82 basis points to 5.28%, its highest level since 2007, while the German 10-year yield climbed 73 basis points to 3.58%. September’s sell-off was particularly acute at the front end of the European curve, leading to a marked bear flattening. Fiscal concerns added further pressure in France, with the 10-year OAT–Bund spread widening by 48 basis points to 127 basis points, its highest since 2012.

Credit markets, by contrast, showed notable resilience, supported by robust corporate fundamentals and stronger-than-expected growth. Nevertheless, the sharp rise in underlying yields weighed on total returns: euro investment-grade corporate bonds declined 2.6% and euro high-yield bonds 1.6% over the quarter, as the rates shock more than offset the support provided by carry.

Persistent pressure on European rates made this a challenging quarter for Carmignac Sécurité, with losses heavily concentrated in September. Long exposure at the front end of the euro curve was the main detractor. We rebuilt duration somewhat too early, as the three additional ECB hikes already priced by the market on top of June’s increase already implied a restrictive policy path. Instead, the repricing went further, with the expected terminal rate reaching around 3.5% in September, triggering a sharp bear flattening and renewed pressure on short-dated European bonds.

This was partly offset by the attractive carry generated by the credit portfolio and short-dated government bonds, alongside positive contributions from inflation strategies and our short position in French government bonds. Credit protection also contributed positively overall during the quarter. The allocation to highly rated CLO tranches also contributed positively.

Portfolio management remained active throughout the period. Modified duration increased from 2.6 to 2.8 in July as the market was already pricing around three further ECB hikes beyond the June increase. As the rate sell-off intensified sharply in September, we rapidly reduced duration to 1.9, notably through protection on German rates. We also halved our short position in France after the OAT–Bund spread moved above 100 basis points and, towards quarter-end, selectively rebuilt duration to 2.2 by covering short positions on Bobl and Schatz and adding short-dated French and Italian government bonds.

The investment environment continues to combine resilient economic activity with persistent inflation pressures and elevated geopolitical and fiscal uncertainty. However, following the sharp repricing of recent months, we believe the restrictive ECB path embedded in market prices is becoming increasingly difficult to reconcile with Europe’s medium-term growth and investment needs. This creates an attractive asymmetry: fewer hikes than currently priced, or simply a reassessment of how long restrictive rates can be sustained, could unlock meaningful upside in short- and intermediate-dated European bonds.

Against this backdrop, the Fund combines attractive carry and targeted European duration with a diversified range of hedges. Modified duration stood at 2.2 at quarter-end, with long exposure concentrated on the two- to five-year segment. Credit represented 72.4% of assets, primarily through short-dated, highly rated corporate bonds offering attractive income with limited market beta. With credit spreads remaining close to historically tight levels, we have gradually reduced this exposure in favour of short-dated government bonds, where the recent repricing has created more attractive entry points. Long US and euro area breakeven inflation, a reduced short position on France and 8.7% iTraxx Xover protection complement this allocation.

Crucially, the market repricing has also restored a particularly compelling source of return. The Fund’s yield to maturity has risen from approximately 3.9% at end-June to around 4.6%, returning to levels not seen for roughly two years. While reaching these levels has been painful from a mark-to-market perspective, the portfolio now starts from a considerably more attractive position: higher embedded carry provides both a stronger engine for future returns and a larger cushion against further volatility, while the Fund is also positioned to benefit from any normalisation in European rate expectations.