Carmignac P. Flexible Bond: Letter from the Fund Managers - Q3 2026

In the third quarter of 2026, Carmignac Portfolio Flexible Bond posted a net performance of +0.37% for the F share class, while its reference indicator1 was down -3.78%.

The third quarter was characterised by a resilient global growth backdrop, renewed inflationary pressures and a significant repricing of monetary policy expectations, against an increasingly challenging geopolitical environment. The escalation of tensions in the Middle East and persistent disruptions to energy markets drove oil prices sharply higher during the quarter, reviving concerns that the energy shock could gradually feed through to broader inflation. At the same time, renewed trade tensions added another layer of uncertainty to the global outlook.

In the United States, economic activity proved more resilient than initially anticipated. While second-quarter GDP growth and early summer employment data pointed to some moderation, subsequent releases showed renewed strength in the labour market and business activity. Job creation accelerated to 162,000 in August, while unemployment remained low at 4.1%. Business sentiment also remained robust despite higher energy prices. Inflation dynamics became increasingly important as the quarter progressed. Although disinflation initially appeared to be gaining traction, headline inflation subsequently rose to 3.4% in August, while monthly core inflation accelerated. Combined with the resilience of economic activity and the potential pass-through from higher energy prices, this prompted a material reassessment of the monetary policy outlook. After keeping rates unchanged earlier in the quarter, the Federal Reserve ultimately raised its policy rate by 25 bps to 4%, adopting an increasingly hawkish stance and signaling that further tightening could be required.

The eurozone also proved more resilient than expected. Economic activity remained positive despite the energy shock, with the composite PMI improving throughout the quarter and reaching 53.1 in September. The recovery broadened across sectors, supported by stronger services activity in Germany and France, while manufacturing benefited from improving export orders, notably in AI-related equipment and defence investment.

However, stronger activity combined with higher energy and production costs also contributed to renewed inflationary pressures. Eurozone headline inflation reached 3.3% year-on-year, even as core inflation moderated slightly to 2.4%. Against this backdrop, the ECB raised its deposit rate by 25 bps to 2.5%, bringing it towards the upper end of estimates of the neutral rate. With inflation risks remaining tilted to the upside, further monetary tightening cannot be ruled out before year-end.

Elsewhere in Europe, the Bank of England kept rates unchanged at 3.75%, although persistent inflationary risks continue to support the case for additional tightening. Political and fiscal uncertainty also became an increasingly important market driver, particularly in France, where sovereign spreads widened during the quarter amid growing concerns over the fiscal outlook.

Finally, it is worth noting the Bank of Japan raised rates by 25 bps to 1.25%, while the rise in Tokyo headline inflation to 2.7% could also support the case for further monetary tightening ahead.

In this environment, yield curves bear-steepened, with the US 2-year yield rising by 71 bps over the quarter, compared with a 66 bps increase in its German counterpart. At the long end of the curve, the US 10-year yield rose by 82 bps, versus a 74 bps increase in the German 10-year yield.

Carmignac Portfolio Flexible Bond delivered a positive return of +0.37% (F EUR Acc share class) in the third quarter of 2026, compared with -3.78% for its reference indicator, in a particularly challenging environment marked by broad-based weakness across fixed-income markets.

Against this backdrop, the Fund successfully leveraged its broad and flexible investment universe to benefit from the repricing of inflation expectations across developed markets. Our exposure to both inflation swaps and inflation-linked bonds contributed positively to the portfolio. We significantly increased our allocation to inflation-linked securities over the quarter, from 28% of net assets at the beginning of the period to 42% at the end of September, reflecting our conviction that inflationary pressures could prove more persistent than currently anticipated by markets.

We also made full use of the Fund’s flexible mandate to actively manage modified duration, moving from 0.0 at the beginning of the quarter to 3.3 at the end of September. Our short positions at the long end of both the US and European yield curves, proved particularly effective in this bear-steepening configuration of developed-market yield curves over the quarter.

At the same time, we significantly increased our exposure to the front end of the euro yield curve in September, following the sharp rise in short-term yields. Markets are now pricing in four additional ECB deposit rate hikes over the next twelve months, followed by a prolonged stabilization around 3.5% beyond 2027. In our view, this trajectory appears excessively restrictive given the eurozone’s modest potential growth and the increasing vulnerability of the economy at this late stage of the cycle. We therefore believe our positioning at the front end of the euro curve could provide an attractive source of performance in the months ahead, particularly should the ECB ultimately prove less hawkish than currently priced.

At the end of September, the portfolio offered an embedded yield of 3.4%, with an average credit rating of A- and credit hedges representing approximately 19% of net assets. Overall, we believe the combination of inflation-linked instruments and exposure to short-dated European rates leaves the portfolio well positioned across different macroeconomic scenarios: inflation-linked exposure should continue to benefit if inflation proves more persistent than expected, while our positioning at the front end of the euro curve could provide support should economic activity weaken and monetary policy expectations turn less restrictive.

We believe the current environment remains particularly supportive for a flexible fixed-income strategy. Valuations remain demanding across several segments of the market, while volatility could continue to rise over the coming months, creating a broad range of investment opportunities.

Following another quarter marked by a sharp rise in sovereign yields, attractive opportunities are beginning to emerge, particularly at the front end of the European yield curve, where we believe markets are overly pessimistic regarding the extent of ECB tightening over the medium term. Conversely, we expect upward pressure on long-term yields in both Europe and the US to persist, driven by a repricing of inflation expectations and a rebuilding of term premia against a backdrop of persistently large fiscal deficits across developed economies.

We also maintain a cautious stance on credit. The economic repercussions of the conflict in the Middle East, combined with the continued rise in the cost of capital, are likely to weigh further on corporate fundamentals, particularly at the more speculative end of the credit spectrum. Against this backdrop, we maintain limited exposure to these assets alongside High Yield credit index hedges representing approximately 19% of net assets. This positioning should allow us to benefit from a potential widening in risk premia while preserving the flexibility to tactically redeploy capital should valuations become more attractive.

Finally, we remain convinced that medium and long-term inflation expectations are likely to be revised higher. Indeed, markets continue to price a rapid decline in inflation to below 2.5% on both sides of the Atlantic by the end of 2027, a scenario we consider optimistic given the gradual pass-through of higher commodity prices and the resilience of underlying inflationary pressures. With 42% of the portfolio invested in inflation-linked bonds and more than 250 basis points of duration exposure through inflation swaps, the Fund is well positioned to benefit should inflation prove more persistent than currently anticipated.

In an environment where traditional fixed-income strategies remain vulnerable to both renewed inflationary pressures and a potential increase in risk aversion, our flexible approach enables us to actively adjust interest-rate and credit exposures through derivatives and take advantage of opportunities created by higher market volatility.

This flexibility currently leads us to favour a more opportunistic portfolio allocation, combining a significant allocation to inflation linked instruments, credit hedges and tactical positions across rates with a greater sensitivity to front end of euro curve. This positioning is designed to preserve resilience while maintaining sufficient flexibility to capitalize on future market dislocations as more attractive opportunities emerge.