LO Funds (CH)
Ultra Low Duration (CHF)

MACRO AND MARKET REVIEW

Despite a move higher in interest rates, strong credit performance saw fixed income markets broadly flat at an aggregate level for August, as the appetite for carry remained robust. Thirty-year Treasury yields briefly rose above 5.3%, their highest level since 2007, while long-dated French and German government bond yields reached levels not seen since the sovereign debt crisis. Markets became increasingly concerned that a combination of persistent inflation, large fiscal deficits and rising term premia would keep long-term borrowing costs elevated. Credit markets remained relatively resilient, supported by another quarter of strong corporate fundamentals, although higher rates volatility weighed on parts of the lower quality credit universe.

The geopolitical backdrop remained dominated by the continuing conflict between the US and Iran. Periodic military exchanges and continued disagreement over access to the Strait of Hormuz maintained a high degree of uncertainty for global energy markets, with a move towards tit-for-tat tanker strikes a particular concern. Officially observed shipping volumes through the Strait remained well below pre-conflict levels, but with many vessels continuing to rely on alternative routes or operating with limited visibility, oil price moves have been orderly. However, the bigger issue lies in refined products, most notably diesel, and natural gas markets. These have continued to rise and now sit above March highs. Their feedthrough into inflation figures over the winter period requires close attention.

US macro data provided somewhat mixed signals for markets. Inflation remained above the Federal Reserve’s 2% target, with July PCE inflation running at 3.7%, while higher energy prices continued to present upside risks. However signs of a slowing, or at least stagnant, labour market paint a contrasting picture. This has led to a stark fragmentation in the FOMC, with several policymakers arguing that policy was not sufficiently restrictive, while others highlighted signs of slowing growth. That said, Chair Warsh’s Jackson Hole speech was interpreted on the more hawkish side, stressing that inflation progress remained inadequate and reinforcing expectations that additional tightening could still be required if price pressures failed to moderate further, putting the September decision into sharp focus.

Against this backdrop, another development saw Treasury Secretary Scott Bessent unveil proposals to support the Treasury market through expanded buybacks of longer-dated debt financed by increased short-term issuance. The announcement sparked a short-term rally in long-dated Treasuries and prompted speculation that the Treasury could further reduce long-end issuance later in the year. Although the initial rally in treasuries was sharp, many market participants remained sceptical that technical interventions alone could deliver a sustained decline in yields without clearer evidence of cooling inflation and slower economic activity, ultimately causing the rally to be short-lived.

European developments mirrored many of the themes seen in the US. Hawkish comments from several Governing Council members reinforced the view that inflation risks, particularly those linked to energy prices, remained a concern despite slowing economic momentum. France remained a focal point for investors, with concerns around fiscal credibility contributing to underperformance in long-dated French government bonds with next year’s elections coming into investors’ focus. While some ECB officials cautioned against overtightening in response to what remains partly a supply-driven shock, markets entered September expecting at least one further increase in policy rates this year.

Overall, August highlighted the challenges facing fixed income markets as investors balanced persistent rates pressures against strong fundamentals and a clamour for attractive carry opportunities in credit. Geopolitical uncertainty, elevated government borrowing requirements and increasingly hawkish central bank rhetoric combined to create a difficult environment for duration. Nonetheless, yields across many developed markets have reached levels that increasingly compensate investors for these risks, while high quality fixed income continues to offer attractive income opportunities.

Portfolio Activity: The EUR fund continued to attract investor demand, with assets under management rising by approximately 1% during August, while portfolio activity remained focused on capturing attractive carry opportunities further along the curve and maintaining duration at around 0.8 years. A notable transaction was the switch from the February 2027 Kommunalkredit Austria bond into the March 2028 maturity, capturing an additional 64 bps of yield while retaining exposure to the same issuer profile. In the USD fund, we continued to identify attractive opportunities in the 1.5 to 2 year segment, adding positions such as Baiterek National Managing Holding at a yield of 5.02%, Deutsche Bank AG at 5.05%, and Blackstone Private Credit maturing in March 2027 at a yield of 5.67%. The CHF fund participated in the new three-year Chubb INA Holdings LLC issue, priced with a 0.86% coupon, allowing the portfolio to lock in yield on an A-rated issuer despite the low-rate environment. To balance this exposure and preserve portfolio liquidity, we also added a short-dated Banco Bice bond with approximately 60 days to maturity at a yield of 0.71%, consistent with the fund’s barbell strategy.

Performance: August was marked by a hawkish repricing of the front end of yield curves, particularly in Europe, where short-term rates moved higher as markets increased the probability of further policy tightening. Despite this backdrop, the Ultra Low Duration EUR fund delivered a monthly non-annualised net return of 0.18%, marginally outperforming the ESTR Compounded Index by 0.01%. The Ultra Low Duration USD fund outperformed the SOFR Compounded Index by 0.05%, continuing its recovery after the volatility experienced earlier in the year. The Ultra Low Duration CHF fund gained 0.06% in August and outperformed the SARON Compounded Index by 0.06%. While negative short-term Swiss franc rates keep benchmark returns subdued, our strategy continues to deliver positive performance, bringing year-to-date returns to 0.26%. Across the range, exposure to floating-rate securities, disciplined duration management and carry generation helped offset the impact of higher short-term yields on fixed-rate bond prices.

Outlook: We continue to view the current environment as supportive for ultra low duration strategies. Although markets remain sensitive to shifts in central bank expectations and short-term rate repricing, the funds’ limited duration profile allows portfolios to adjust quickly and reinvest maturing proceeds at potentially more attractive yields. Compared with longer-duration fixed income strategies, ultra low duration portfolios should remain less exposed to interest-rate volatility while continuing to benefit from portfolio turnover and carry generation. In Switzerland, where yields remain comparatively low, maintaining a balance between liquidity, capital preservation and selective yield enhancement remains a key focus. With policy rates still elevated and central banks appearing more focused on inflation risks than on delivering rapid rate cuts, we believe the strategy remains well positioned for investors seeking an alternative to cash that can potentially deliver positive excess returns over cash benchmarks while maintaining limited volatility.