Mike Riddell, portfolio manager of Fidelity Strategic Bond Fund
The escalating conflict in the Middle East recently dominated headlines but had little lasting impact on market sentiment, with volatility spikes short-lived. Meanwhile, in the UK, gilt markets sold off due to fears that the fiscal headroom rule would be scrapped. This fear began to ease as the Prime Minister reaffirmed his support for the Chancellor and retaining fiscal headroom, but gilt yields remain elevated.
More broadly, macroeconomic and geopolitical concerns have had little impact on credit spreads, which have largely rallied in recent weeks.
Measures of market implied volatility and credit spreads are back to low levels
Source: Bloomberg, 30 June 2025. Indices used are the MOVE Index, JPM VXYGL Index, VIX Index, and ICE BofA BBB Corporate Bond Index.
Rates
Emerging markets (EM) local rates remain our highest conviction position in rates markets due to attractive real yields and support from the ongoing weakening of the US dollar.
In developed markets, we took the opportunity to buy 20-year gilts after the selloff as we doubted that the UK government would allow an avoidable gilt crisis to unfold. Tax rises later in the year might also be supportive of reduced issuance alongside the potential for a slowing QT policy from the BoE.
We have been adding duration in the US, where we see the potential for a sharp growth slowdown in the second half of 2025 which could force the Fed to cut rates. Easing financial conditions may be flattering economic hard data, which we believe could reverse as tariffs come into effect.
Norway's central bank has recently cut rates, but we still like being long rates in Norway as this could be the start of a steady cutting cycle to support the economy.
Inflation
We remain long inflation protection due to the attractive carry and the hedge it provides against some of our long nominal duration positioning.
Markets are currently pricing in benign inflation rates which we think deserve a greater premium given the possible impact of tariffs. This scenario is not our base case, but we see an attractive risk / reward profile here.
Currencies
Our highest conviction forex position is a short US dollar exposure against a basket of EM currencies.
While many market participants have picked up on the short dollar trade, we think institutional flows could weaken the currency even further. Meanwhile, EM currencies screen historically cheaply in REER terms, such as Brazilian Real, Columbian Peso, and Peruvian Sol.
Outside of EM, Norwegian krone looks very cheap compared to GBP and other developed market currencies.
We have gained exposure to NOK against GBP which reflects our view on the currency's valuation, but also helps hedge some of our Norwegian duration positioning.
NOK/GBP is also moderately correlated to oil prices, giving us an indirect inflation hedge.
The Pound looks quite expensive, currently trading around its 2015, pre-Brexit, levels which we do not see as sustainable given the twin-deficit economy.
Credit
Credit is still an unattractive allocation for us as spreads are trading at historically tight levels.
With credit there is little upside from carry that cannot be extracted from government bonds, but with looming default risk which has yet to materialise.
Tariff implementation could squeeze corporate issuers further, and potentially push some into distress and default, a risk that is barely compensated over government rates.
During the peak of the Liberation Day volatility, we saw an opportunity to go overweight, but quickly took profits as spreads recovered.
Important Information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Fidelity's range of fixed income funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Fidelity only gives information on products and services and does not give investment advice to retail clients based on individual circumstances. Any comments or statements made are not necessarily those of Fidelity. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. FIPM 9182
