Bond markets have been firmly in focus over the past 12 months, as headlines around central bank rate decisions, questions over whether we are in a 'higher for longer' rate environment and increasing concern over government fiscal and trade positions have been a media mainstay. Looking through the noise however, there are two key themes to pick out whilst looking back over the period.
Whilst it is easy to get lost in the daily volatility, government yield curve steepening has been the clear theme. The US 10-year yield started the financial year at 4.46% and at the end of May 2025 it was almost unchanged at 4.40%. Over the same timeframe the US 2-year yield has fallen almost 90 basis points whilst the 30-year has risen by 30 basis points. There has been a similar theme seen across other government yield curves, as investors grapple with central bank cutting cycle timing against longer-term fiscal concerns.
The strength of credit markets has continued to surprise. Whilst there have been brief periods of credit volatility, a strong market demand for yield has driven relentless credit spread compression. Whilst issuer credit fundamentals have remained relatively resilient in most places, this alone does not justify the sustained spread compression. The demand technical can be sustained with yields at attractive levels versus equity dividend yields for example, but versus history global investment grade credit spreads have been trading at valuation levels not seen since before the 2008 Global Finance Crisis.
These factors highlight how complexity in global bond markets has increased against an uncertain macroeconomic and geopolitical backdrop, underlining the importance of a truly active approach to shifting interest rate dynamics and bottom-up research insights applied to valuation stretched credit markets.
Looking at what worked well for The Fidelity Global Bond over the period, our defensive positioning has been key. Whilst our interest rate positioning was underweight, at a headline level, our overweight in the 5–10-year part of the US curve as well as in German Bunds were strong contributors to performance. The Fund's underweight to Japanese duration was also a material contributor given the divergent monetary policy path here.
The Fund has maintained an underweight to credit risk, on the basis that valuations do not provide adequate compensation. Whilst this has been a detractor from performance as a result of the continued spread tightening, it is worth noting that there have been no material single name credit detractors from performance. This defensive base also enabled the fund to exploit periods of market volatility where we were able to add credit risk at more attractive valuations, rather than chasing the market tighter.
Looking ahead, we continue to expect a slowdown in US growth driven by a consumer spending slowdown, combined with weakness in the labour market resulting in a more aggressive US Federal Reserve cutting cycle than the market currently prices. We also maintain our defensive credit positioning on a valuations basis and remain prepared to add exposure during market dislocations. The key lesson we have learnt through this turbulent twelve months is the importance of remaining nimble during periods of volatility, and tactically trading in and out of ranges in duration and credit.
