Carmignac P. Flexible Bond: Letter from the Fund Managers - Q1 2026

In the first quarter of 2026, Carmignac Portfolio Flexible Bond posted a net performance of +0.69% for the A share class, while its reference indicator¹ was down -0.63%, resulting in an outperformance of +1.32% for the fund.

The beginning of 2026 was marked by a clear deterioration in the geopolitical environment. Among the major events were the arrest of Venezuelan President Nicolás Maduro by the United States, tensions related to U.S. ambitions regarding Greenland, and, most notably, the escalation of the conflict involving the United States, Israel, and Iran. The latter is the most structurally significant factor for bond markets, due to the substantial disruption to commodity flows—particularly with Iran’s blockade of the Strait of Hormuz.

In this strategic region, through which nearly a quarter of global hydrocarbon production transits, the prospect of a prolonged conflict is exerting significant pressure on inflation expectations. Brent crude oil has risen by +74% since the beginning of the year¹.

In this context of sharply rising commodity prices, both investors and central banks have significantly increased their inflation expectations for 2026. The European Central Bank (ECB) has notably adopted a more hawkish stance, signaling the possibility of proactive monetary adjustments to prevent any second-round effects. Markets have therefore substantially revised their expectations, shifting from anticipating slight rate cuts to pricing in three rate hikes by year-end. Short-term rates have adjusted markedly, as illustrated by the German 2-year yield (+47 bps), compared to a more moderate increase of +15 bps on the long end of the curve.

A similar dynamic is observed in the United States, where expectations have shifted from three rate cuts at the beginning of the period to a monetary policy hold. Beyond the impact of the energy shock, the first effects of the U.S. administration’s trade and immigration policies are beginning to materialize, with an increase in the producer price index (+3.4% year-on-year in February) and wages (+3.8%). Short-term rates have thus risen by +32 bps over the quarter, compared to +15 bps for the 10-year yield, reflecting persistent concerns about a potential deterioration in the labour market, particularly linked to the rise of artificial intelligence.

In Japan, the yield curve has also moved higher following snap legislative elections in February, which enabled Prime Minister Sanae Takaichi’s party to regain a majority in the lower house. This political configuration should facilitate the implementation of the €117 billion stimulus plan announced at the end of 2025, as well as measures to support household purchasing power.

Finally, in the credit segment, the second part of the quarter was marked by a renewed rise in risk aversion in a deteriorating geopolitical environment. Spreads widened significantly, particularly in the European high-yield segment (+109 bps), compared to +21 bps for investment grade.

Our inflation-linked strategies, as well as our credit hedges, were the main contributors to the fund’s positive performance in the quarter. In a context marked by renewed inflationary pressures in the United States and, above all, the emergence of a new conflict in the Middle East, inflation expectations were revised upward on both sides of the Atlantic, while credit spreads widened.

We fully leveraged the flexibility of our mandate, particularly in managing interest rate sensitivity, which fluctuated within a range of [-0.9; +3.1] over the quarter. Initially, short positions on U.S., European peripheral, UK, and Japanese rates allowed us to benefit from rising yields. Toward the end of the period, we gradually built exposure to European short-term rates following the significant adjustment observed on this segment of the curve.

In addition, our gradual profit-taking on credit assets over the past twelve months—particularly on subordinated financial debt at the beginning of the year—helped reduce the portfolio’s sensitivity to spread widening during the escalation of tensions in the Middle East. The scaling up of credit hedges also proved to be a significant performance driver in March.

At the end of the period, the fund’s duration stood at +2.9, reflecting a strong preference for short-term rates in the euro area, as well as a cautious stance on long-term rates in certain high-deficit countries such as France, Japan, and the United States. The portfolio offers a yield to maturity of 3.3%, an average rating of A-, and a credit hedge level equivalent to 23% of net assets, thereby providing a defensive profile suited to an uncertain environment.

The increase in volatility in bond markets represents an opportunity for a flexible strategy such as ours, as it multiplies potential sources of performance.

First, the shift in market expectations regarding monetary policy provides a favourable environment for expressing strong convictions. This is particularly the case in the euro area, where investors are now pricing in three ECB rate hikes by year-end. While the region remains sensitive to commodity shocks, as seen in 2022, such a pronounced monetary tightening appears unlikely to us in a context of still-fragile growth and in the face of an inflationary shock that is largely exogenous in nature.

Second, our credit hedging strategy could continue to contribute positively, given the still-limited correction in risky assets despite ongoing geopolitical tensions.

Finally, we maintain a strong conviction that medium- and long-term inflation expectations will be revised upward. While short-term expectations have already adjusted, 5- and 10-year expectations still offer, in our view, further upside potential.

With 16% of the portfolio invested in inflation-linked bonds and more than 300 basis points of inflation swap duration, we believe the fund is positioned to benefit from a more persistent inflationary environment.

In a context where traditional bond strategies are generally penalized by the resurgence of inflation and rising risk aversion, our flexible approach allows us to dynamically adjust exposure to rates and credit through derivatives, in order to take advantage of increased volatility.

This flexibility leads us to maintain a cautious asset allocation in the portfolio, with a significant share of money market instruments, while deploying hedging strategies aimed at capturing opportunities arising from potential market dislocations.