Our macro view hasn’t changed since the start of the year, but our strategy has evolved in response to recent market dynamics. We continue to believe that inflation will remain elevated, and that growth will come under pressure in the second half of the year. What has changed is our positioning ─ and we’ve started to regain performance after a challenging period around “Liberation Day.”
We began the year with lower duration, expecting that tariffs, tax cuts and deregulation would be seen as inflationary without immediately weighing on growth. That view turned quickly as initial tariff announcements triggered a rally in yields. Our decision to hedge both duration and credit risk at that point hurt performance due to timing, but we have since removed or reduced many of those hedges.
Since then, the market narrative has oscillated weekly between fears of stagflation and hopes of a soft landing. Through that noise, we’ve remained consistent: we believe inflation will prove sticky, growth will slow through the second half of the year, and a longer-duration stance is now appropriate. We’ve gradually increased duration as yields moved higher, focusing particularly on the long end ─ a part of the market that remains unloved but where we continue to see opportunity.
The long end has underperformed across geographies, including in US Treasuries, European bonds, and especially in Japan. This is an unloved section of the market that many are avoiding: unnecessarily so, in our view. Despite talk of waning safe-haven status, we saw yields respond when geopolitical tensions rose in response to escalating tensions between Israel and Iran ─ a reminder that long bonds can still provide ballast.
Credit markets, meanwhile, have recovered their losses since April. We think this is a little optimistic, given that minimum 10% baseline tariffs will remain in place, and these will negatively impact growth. We’ve trimmed some high yield names that rallied back to pre-Liberation Day levels, particularly those of lower quality. Dispersion remains in the CCC space, where refinancing risk is now a clear headwind.
That said, our core positioning remains strong. Credit fundamentals are holding up, and higher yields continue to attract inflows. We’ve taken advantage of spread widening in April to add to BBBs, especially in cyclical areas where pricing implied a recession.
Overall, we’ve positioned the portfolios more constructively while keeping a cautious eye on the second half. Duration on our global strategic bond strategy is now around 5.2 years, and slightly above benchmark in our global high yield strategy, at 3.2 years. With risks moderating and opportunities re-emerging, we feel this is right place to be.
