Carmignac Portfolio Global Bond: Letter from the Fund Manager

During the second quarter of 2025, Carmignac P. Global Bond posted a performance of -1.67%, compared with -4.23% for its reference indicator, bringing its performance since the beginning of the year to -0.83%, compared with -5.53% for its reference indicator¹.

The second quarter of 2025 began with renewed risk aversion in fixed income markets following the Trump administration’s announcement of tariffs on all trading partners. Although the tariffs were delayed until July, investor confidence faltered, with markets pricing in up to four US rate cuts amid pessimism over growth. However, resilient employment data and stronger-than-expected inflation later shifted expectations to two rate cuts in the second half of the year.

Geopolitical tensions escalated in the Middle East between Israel and Iran, triggering air strikes on Iranian nuclear sites. While this caused volatility in commodity prices and fears of a wider conflict and Strait of Hormuz blockade, fixed income markets remained resilient, supported by strong technical factors. Credit spreads tightened despite these pressures, with the iTraxx Xover index narrowing by 45 basis points.

In the eurozone, rates eased, erasing the impact of Chancellor Merz’s earlier announcements; the German 10-year yield fell 13 basis points. The European Central Bank (ECB) implemented two rate cuts but maintained a cautious tone amid inflation concerns. Leading indicators, especially in manufacturing, showed signs of improving growth momentum.

In the US, the yield curve steepened sharply amid fears of budgetary slippage, with long-term rates reaching levels not seen since 2007, especially for 30-year bonds. Short-term rates, meanwhile, anticipated further rate cuts on the back of growth worries. Finally, Japan also saw strong pressure on its 30-year rates, which rose by 40 basis points during the quarter as inflation exceeded 3%.

On the currency front, the euro has risen sharply against the dollar, reaching its lowest level since 2021 amid concerns about growth and the demand for USD assets in general. Against this backdrop of a dominant euro, only a few currencies appreciated, such as the Mexican peso and certain Eastern European currencies (the Hungarian forint and the Czech koruna).

In this volatile environment, the portfolio’s duration was actively managed within a range of 3.8 to 6.4. The rate component contributed positively overall, driven by its steepeners on the German yield curve and a long stance on UK rates. However, short positions in the intermediate segments of the Japanese yield curve and French debt had a negative impact. Additionally, tensions at the longer end of the US yield curve slightly weighed on performance. In emerging local rates, our selections in Eastern Europe (Hungary and Poland) and Latin America (Brazil and Mexico) contributed positively.

On the credit front, although credit spreads narrowed sharply in May—reversing the downward trend seen after the US tariff announcement in April—the tightening was more moderate in June. Against this backdrop, the Fund benefited from its exposure to spread products, primarily through its selection of emerging market bonds denominated in hard currencies. These performed well during the quarter, supported by improved sentiment following President Trump’s tariff reversal and the weakness of the US dollar, which favoured emerging markets.

The sharp depreciation of the US dollar against the euro—nearly 9% over the quarter—negatively affected the portfolio’s absolute performance. Concerns about the trade war’s impact on the US economy undermined investor confidence, triggering a sell-off of USD-denominated assets. Although the portfolio had limited exposure to the dollar, its steep decline versus the euro, the portfolio’s reference currency, weighed on returns. To a lesser extent, our long positions on the Japanese yen also suffered from the euro’s strength.

In an environment marked by uncertainty due to the introduction of tariffs, ongoing geopolitical tensions, and the risk of fiscal slippage in certain countries, we expect major central banks across both developed and emerging markets to maintain an accommodative monetary stance. Reflecting this outlook, we continue to maintain a relatively high modified duration, positioned between 4 and 5.

Our rates positioning reflects a nuanced assessment of regional economic dynamics and central bank policies. We hold a modestly long position on US rates, anticipating that while the Federal Reserve will remain cautious until tariff impacts become clearer, it is likely to resume its rate-cutting cycle after the summer. Conversely, we are maintaining short positions in Europe, where growth prospects should improve thanks to the German budget plan, and in Japan, where inflation is taking hold, which should force the Bank of Japan to take action. Within emerging markets, we remain selective, favouring countries such as Brazil and certain Eastern European economies that offer attractive local yields supported by elevated real rates.

On the credit side, we retain significant exposure to capitalize on attractive carry opportunities, focusing on the financial and energy sectors, as well as carefully selected emerging market debt denominated in hard currencies. However, given relatively elevated valuations, we maintain a prudent approach by employing substantial hedging through iTraxx Xover protection to guard against potential spread widening.

Our currency exposure remains conservative, with limited positions in the US dollar and emerging market currencies. We emphasize diversification through allocations to Latin American currencies like the Brazilian real and Chilean peso, alongside commodity-linked currencies such as the Australian dollar, Canadian dollar, and Norwegian krone. Finally, we maintain a long position on the Japanese yen, anticipating that the Bank of Japan will likely be the only major central bank to raise rates this year.