Carmignac Portfolio Global Bond: Letter from the Fund Manager - Q4 2025

In the fourth quarter of 2025, Carmignac P. Global Bond posted a performance of +0.56%, compared with -0.46% for its reference indicator, bringing full-year performance to +0.45%, versus -6.05% for the reference indicator.

2025 was a year dominated by politics, fiscal shocks and central bank pivots, with the return of Donald Trump to the White House acting as the main catalyst for volatility across global fixed income markets.

The year opened with a sharp bond sell-off. Strong US activity data in January, notably a robust December jobs report, pushed the 10-year Treasury yield to a yearly high near 4.8% as markets reassessed the timing of Federal Reserve (Fed) easing. However, inflation data quickly softened fears of renewed overheating, and expectations of rate cuts re-emerged, setting the tone for a year in which monetary policy would oscillate between growth concerns and political pressure.

The inauguration of President Trump on 20 January marked a turning point. Early tariff announcements against Canada, Mexico and China triggered risk-off episodes and contributed to higher term premia, especially at the long end of the US curve. Fixed income markets became increasingly sensitive to policy credibility, fiscal sustainability and inflation risks, culminating in several episodes of abrupt curve steepening. These tensions peaked in early April with the so-called “Liberation Day” reciprocal tariff announcements. The resulting equity crash spilled into rates, with the US 30-year yield recording its largest daily jump since March 2020 as investors reassessed recession and inflation tail risks simultaneously.

By mid-year, fiscal concerns took centre stage. In the US, Moody’s downgrade of sovereign debt and the passage of the “One Big Beautiful Bill Act” reinforced fears of structurally higher deficits. Long-dated Treasury yields repeatedly tested the 5% threshold, even as growth momentum began to slow. Ultimately, weakening labour market data over the summer gave the Fed room to pivot decisively, delivering three rate cuts between September and December. As a result, the 10-year Treasury yield ended the year at 4.17%, down 40bps year-on-year.

In Europe, the fixed income narrative was reshaped by fiscal policy rather than the trade war. After early European Central Bank (ECB) rate cuts supported sovereign bonds, the announcement of a €500bn German defence and infrastructure stimulus in March triggered the largest daily rise in Bund yields since reunification. This marked a regime shift: long-term yields moved structurally higher on expectations of sustained issuance and higher potential growth. Political instability in France compounded the move, pushing French yields above Italian levels for the first time in decades.

Japan provided a final pillar to the global rates story. Persistent inflation near 3%, a surprise change in political leadership and aggressive fiscal stimulus led the Bank of Japan to raise rates twice in 2025. Ten-year JGB yields surged nearly 100bps, their largest annual rise in over thirty years.

Despite these shocks, credit markets proved resilient. Strong carry, falling policy rates in the second half of the year and continued investor demand for yield drove further spread compression across investment grade and high yield, extending a multi-year rally in corporate debt.

This supportive backdrop also benefited emerging market assets, which delivered strong performance in 2025. Improved risk sentiment, declining US rates, resilient global growth, a weaker US dollar and attractive carry fueled robust inflows and broad-based spread tightening across the asset class.

Underlying these trends, the US dollar recorded its worst annual performance since 2017, weakening against all major G10 currencies as US growth moderated, the Fed shifted to an easing bias, and widening fiscal and external deficits eroded the narrative of US exceptionalism.

In 2025, the fund’s performance was primarily driven by its exposure to spread products, with emerging market hard-currency debt standing out as the main contributor. This segment benefited from strong carry and a more supportive macroeconomic backdrop, including improving fundamentals, moderating inflation, renewed capital inflows and the more accommodative stance by the Fed after the summer. Corporate credit also contributed positively, reflecting the strength of the fund’s core investment themes, particularly in the financials and energy sectors.

Interest rate strategies provided a more mixed but overall supportive contribution. The fund benefited from its positioning for a steepening of the German yield curve, as well as from long exposures to Brazilian and South African government bonds. These gains were partly offset by losses on short positions in French government debt, which weighed on performance over the period.

Foreign exchange strategies were the main detractor during the year. While positions in currencies such as the Mexican peso, Norwegian krone and Hungarian forint generated gains, these were more than offset by the sharp depreciation of the US dollar against the euro. This currency move had a negative impact on performance, despite the fund’s relatively limited exposure to the US dollar overall.

In terms of portfolio evolution, duration was actively managed to reflect shifting rate-cut expectations and evolving macroeconomic risks. In an environment marked by persistent macroeconomic and political uncertainty and gradually moderating inflation, we continued to expect major central banks across both developed and emerging markets to pursue monetary easing. Against this backdrop, we maintained a long duration bias for most of the year, with duration fluctuating between 4 and 6 until September, before being reduced to around 3 at the year-end.

In the US, interest rate positioning evolved meaningfully over the year. Until the summer, we maintained a long bias through curve-steepening strategies and inflation-linked exposures, reflecting the risk of an economic slowdown linked to trade tensions alongside persistent inflation pressures. From October onwards, we adjusted our stance by initiating a short position on nominal rates while maintaining long exposure to breakeven inflation, as market pricing appeared overly optimistic despite continued economic resilience and inflation remaining above target.

European rate exposure was also actively managed. We adopted a flexible approach to German rates, moving from a short position in March following the announcement of the stimulus plan to a long position from April onwards, notably after Liberation Day. From the summer, we consolidated our long exposure to European rates as markets no longer priced further cuts despite persistent downside risks to growth. At the country level, we initiated a short position on France in May amid heightened political uncertainty. In the UK, we shifted from a long to a short position as concerns over budgetary slippage intensified.
On emerging markets, we maintained a long bias on local currency debt throughout the year, supported by strong convictions in Eastern Europe and select Latin American countries, particularly Brazil. In parallel, exposure to spread products combining credit and hard-currency emerging market debt remained elevated given their attractive carry, while credit hedging was maintained as valuations reached historically tight levels.

Finally, in foreign exchange, the fund maintained a limited exposure to the US dollar, as trade tensions weighed on investor confidence and contributed to a gradual depreciation of the greenback.

In a context of persistent uncertainty marked by end-of-cycle valuations, trade tensions and significant fiscal stimulus, Carmignac P. Global Bond maintains a balanced and cautious positioning. With monetary policies expected to remain broadly accommodative, the portfolio holds a moderate modified duration of around 3.1, primarily driven by emerging market debt exposure, while remaining cautious on core developed market rates.

Interest rate positioning reflects a selective and disciplined approach. In the US, the fund remains short duration and long breakeven inflation, as expectations for rate cuts appear overly optimistic given resilient growth and inflation still above target. In Europe, positioning is focused on the short end of the curve, where further easing is no longer priced, alongside a short position on France due to elevated political and fiscal risks. We have also initiated a short position on UK rates amid concerns over budgetary slippage and remain short Japanese rates, where rising inflation and continued fiscal stimulus argue for higher yields. In emerging markets, we remain selective, favouring local rates offering attractive real yields, particularly in Brazil and parts of Eastern Europe.

Spread products continue to be a key performance driver. The portfolio maintains significant exposure to hard-currency emerging market debt, supported by strong carry, improving fundamentals, moderating inflation, capital inflows and Fed easing. However, given tight valuations, we remain prudent and maintain substantial protection via iTraxx Xover to hedge against potential spread widening.

Currency positioning is consistent with this cautious stance. US dollar exposure remains limited, reflecting the Fed’s easing bias. We favour selected Latin American currencies, such as the Brazilian real, Mexican peso and Chilean peso, as well as commodity-linked currencies including the Australian dollar and Norwegian krone. We also maintain a long position in the Japanese yen, which should benefit from the Bank of Japan’s gradual monetary normalisation.