Date:

Marketing Communication

Executive Summary

Key events in market

Persistent oil prices amid ongoing Strait of Hormuz tensions kept inflation above expectations, forcing the Federal Reserve to raise interest rates at its September Federal Open Market Committee meeting. The European Central Bank delivered its second hike since the Iran war began, while the Bank of England kept rates stable but warned that a hike may be needed if inflation persists. Government bonds widened sharply across regions. Spreads also widened during the month.

Key performance & positioning updates

September was a challenging month for fixed income, with both rates and spreads widening across regions and sectors. The Fund’s broadly neutral duration stance combined with a barbell strategy contributed positively to yield positioning, while its higher exposure to emerging markets (EM) detracted as spreads widened more in EM than in developed markets. As duration becomes more attractive, the Fund has been adding cautiously in higher quality buckets to take advantage of better entry points.

Market Update

September saw a continuation of the "soft patch" that has characterised global equity markets since late spring. The MSCI All Countries World Index fell 1.1% during the month, trimming its year-to-date gain to 13.4%. The month saw a rotation towards technology stocks, with the Nasdaq gaining over 3%, at the expense of small caps, as the Russell 2000 Index dropped more than 4%. Geographically, Japan was the top performer among developed markets, while European markets posted widespread losses, weighed down by renewed geopolitical tensions and the resulting rise in energy prices.

Nevertheless, global equity markets demonstrated resilience despite a half-percentage-point surge in bond yields during the month. Yields on 10-year and 30-year US Treasuries climbed well above 5%—levels not seen since the early 2000s. In Europe, German government bond yields rose by a more modest 0.25 percentage points, but the move coincided with a significant widening of government bond spreads, particularly in France and Italy. Bond market weakness reflects a combination of factors. First, inflation concerns driven by high energy prices, coupled with resilient economic growth, prompted investors to revise their expectations for policy rates upward. Second, concerns about the trajectory of US public debt persist. Finally, in Europe, apprehension about the general elections scheduled for 2027 in France, Italy, and Spain appears to have weighed on sentiment.

Rising bond yields and expectations of a less accommodative Federal Reserve, even after the September interest rate increase, have contributed to the recovery in the US dollar, a trend also supported by rising energy prices. Dollar appreciation and high real bond yields have weighed on the price of gold, which has surrendered almost all of its August gains. Although hopes for a quick resolution to the conflict in the Middle East are slim, a further escalation appears to have been averted, at least until the US midterm elections on 3 November. Some sources also indicate that oil transit through the Strait of Hormuz has rebounded to two-thirds of pre-conflict levels. Nevertheless, global refining capacity remains constrained, and prices for refined products, particularly diesel, remain very high and pose a risk to the inflation outlook.

Fund Performance & Positioning

The dominant macro driver was the persistence of elevated energy costs linked to ongoing Strait of Hormuz tensions, which kept inflation well above central bank targets and prompted a renewed hawkish tilt across major central banks. The Federal Reserve raised interest rates at its September meeting, with Chair Warsh reaffirming the Committee’s commitment to returning inflation to target. Although the hike was widely anticipated, yields moved higher as markets absorbed the decision alongside a significant wave of new corporate issuance.

The US yield curve flattened materially, with the 2s10s spread narrowing to as little as 17 basis points (bps), increasing the risk of inversion as markets priced a higher for longer policy path. The Fund maintained a relatively neutral stance on overall duration, with a barbell positioning that favoured duration in high quality credits. This allocation was beneficial on a relative basis given the flattening and the more pronounced spread widening in lower rated credit. The Fund selectively increased exposure to long dated AA rated bonds such as Nvidia 2046 and Meta 2063 at attractive entry levels.

Against this backdrop, higher beta segments underperformed, with spreads widening across regions and sectors, particularly in high yield and emerging markets. The Fund continues to hold a meaningful allocation to emerging markets, which detracted over the month, although security selection added value. Exposure to the Gulf Cooperation Council has been gradually reduced as opportunities in other regions and sectors have become more attractive; however, the Gulf Cooperation Counci (GCC) remains fundamentally well supported, underpinned by strong external balance sheets and substantial fiscal buffers among the largest sovereigns.

The macro environment entering October is characterised by resilient but moderating growth, persistent inflationary pressures and elevated geopolitical uncertainty. A flexible, fundamentally driven global investment process is well positioned to take advantage of oversold conditions. With overall spreads still tight despite the recent correction, careful credit selection and active diversification remain critical. The Fund has kept duration and rating profiles broadly stable while maintaining strong diversification by country and sector. As yields have become more attractive, the Fund has selectively added exposure where rate driven volatility has improved entry levels and trimmed positions where spreads no longer offer adequate compensation for risk.

Outlook

Recent moves in global yields and policy rates are reinforcing the importance of balance sheet strength and institutional resilience. As financing costs rise and capital becomes scarcer, the distinction between issuers with a strong and credible capacity to service debt and those with more fragile profiles is becoming more pronounced. Recent central bank decisions have added further upward pressure to global bond yields, but we would be cautious about extrapolating this into a prolonged and aggressive tightening cycle. The near‑term trend in yields may remain biased higher, supported by robust corporate earnings, elevated government borrowing and large scale investment in AI, data centres, power and related infrastructure that appears relatively insensitive to interest rates. This combination is creating competition for increasingly scarce capital and pushing up the price of money, yet companies are still generating solid nominal returns on investment. Whilst returns remain above financing costs, demand for capital can remain resilient even as rates rise.

Importantly, higher bond yields are themselves a form of tightening: they raise hurdle rates, compress valuation multiples and make marginal projects less attractive. Over time, this environment tends to reward issuers with disciplined fiscal frameworks, robust external positions, stable policy settings and diversified economies, whilst exposing vulnerabilities where debt trajectories or political constraints limit the room for adjustment. France provides a prominent example where persistent deficits, rising debt and political constraints on consolidation have led investors to demand a higher risk premium, and a heavy global election calendar could reinforce this pattern of differentiation.

Against this backdrop, we believe a global, active, relative value approach is well suited to the current environment. Dispersion across countries, sectors and issuers allows capital to be allocated according to compensation for risk rather than benchmark weight, and what we avoid can be as important as what we own. Higher starting yields enhance income and provide a greater cushion against volatility, whilst the focus on robust fundamentals supports potential resilience if global growth slows or risk sentiment deteriorates. Our approach is to allocate to issuers with sustainable debt dynamics and to avoid those where rising yields could expose structural weaknesses. As markets continue to differentiate more sharply, we believe a disciplined, fundamentals‑driven strategy that blends the best of high quality emerging and developed markets can offer an attractive combination of income, diversification and downside protection. Our central view is not that yields must reverse imminently; strong nominal growth, AI related investment and government borrowing can sustain near‑term pressure. However, higher yields ultimately reshape the economic conditions that support them, and we see an increasingly attractive combination of income, diversification and potential downside resilience in investment grade credit.

Disclaimer

MARKETING COMMUNICATION

For professional clients, qualified investors and accredited investors only. The value of investments and the income derived from them can fall as well as rise, your capital is at risk. Note: Past performance is not a guide to the future. Returns may increase or decrease as a result of currency fluctuations.

All sources: EFG Asset Management (UK) Limited ("EFGAM"), Factset, Bloomberg, Morningstar as at end of the month.  Any other sources as applicable. 

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For Professional, Institutional and Wholesale Investors Only. This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 7389736 and with its registered office address at Park House, Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No. 536771. EFG Asset Management (UK) Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the United Kingdom (FCA Registration No. 536771) under the laws of the United Kingdom which differ from Australian laws.  This document is personnal and intended solely for the use of the person to whom it is given or sent and may not be reproduced, in whole or in part, to any other person.
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