GIB AM Sustainable World Corporate Bond Fund | Q2 Market Commentary & Outlook

Q2 started abruptly with Trump’s ‘Liberation Day’ announcements which set a universal 10% baseline tariff on nearly all imports, with higher reciprocal tariffs for many countries. This sent global financial markets tumbling and economists started to predict weaker growth and higher inflation as a result. After US 30yr yields jumped by over 54bps (the biggest three day increase since 1982) and global spreads rose materially (by more than 100bps for Global HY), Trump announced a 90-day pause. This calmed the market and eventually led it back on an upward trajectory for the remainder of quarter. The S&P500 eventually reached new all-time highs, whilst credit markets rallied back strongly and spreads closed tighter.

The quarter was also marked by escalating geopolitical tensions. During April, US/China relations deteriorated as a tit-for-tat trade war ensued, with tariff levels effectively barring US/China trade from occurring. In May, a 90-day reprieve on Chinese tariffs was announced as negotiations in Geneva and London advanced, which marked a significant de-escalation and left Chinese imports at a more bearable 10% baseline tariff with a 20% fentanyl related surcharge on most goods. Elsewhere, tensions flared in the Middle East, leading to a military conflict in which the US directly intervened. The violent exchange of missiles and drone attacks in the region temporarily drove oil prices higher but had limited overall market impact as the conflict remained somewhat contained.

In the rates markets, the US Treasury curve steepened over the quarter. Front end yields fell due to concerns over growth and improving month-on-month core inflation readings, whilst longer end yields went higher due to rising risk premiums stemming from the potential impact of the Big Beautiful Bill on the fiscal deficit and debt burden in the US. In Europe, the bund curve bull steepened as it became clearer that inflation is trending back to the ECB’s medium-term target, but the long end of the curve saw no such respite as European nations committed to further defence spending at the 2025 Nato Summit.

In credit markets, spreads tightened over the quarter, with High Yield (HY) outperforming Investment Grade (IG) and the US marginally outperforming Europe, reversing the trend seen during the first quarter. Global IG spreads closed the month of June only a few basis points above their year-end lows, despite a round trip that took them about 20bps wider in April before tightening back by around 40bps. The trend was similar across HY (where spread volatility exceeded 125bps) and Emerging Market (EM) corporates, which ultimately slightly underperformed due to a slower recovery.

At this point, US IG spreads are trading at levels “more than one standard deviation expensive” than the 10y average, a pattern seen across most asset classes.

Chart 1: US IG spreads (1)

Given these historically tight spreads and our cautious outlook for the global economy going into H2 25, we believe conservative risk positioning is the most appropriate approach at this juncture. As a result, we have reduced the portfolio’s DTS beta relative to the custom benchmark to below 0.95x, one of the most conservative positions since the Fund’s inception in September 2022.

While the US economy has demonstrated strong resilience over the H1 25, signs of a slowdown are emerging. These include softer confidence readings, cooling retail sales and a gentle uptick in default rates. Meanwhile, global uncertainty remains elevated. Trade tensions persist despite a three-month negotiation pause, and there is no clear path to a resolution in the ongoing conflicts in Ukraine and the Middle East.

Against this backdrop, we like to move up in credit quality where spreads appear overly compressed, are taking a more selective approach to HY exposure, and seek to capture relative value opportunities, such as extending duration in steeper Euro-denominated curves versus US dollar equivalents. Our investment process also supports maintaining duration at neutral levels. This reflects the absolute level of government bond yields (particularly in the US) and the interesting upside/downside potential over the medium term. That said, we acknowledge that the ongoing deterioration in the fiscal outlook could lead to further curve steepening.

Overall, we continue to see investment grade bonds as an attractive risk-reward proposition. They provide steady income in a relatively expensive market and are likely to benefit from rate cuts should the global economy weaken materially. We expect volatility to remain elevated in the second half of the year and are well-positioned to take advantage of any market dislocation.

(1) GIB AM Analysis as at 30.06.2025

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