May 2026 net performance was positive 0.41%. Another month gone by with no resolution to the Middle East conflict between the US, Israel and Iran. The ceasefire (of sorts) appears to be holding despite regular missile and drone activity. However, the market continues to assume a memorandum of understanding (MOU) is in the offing near term, as oil pricing is back below $100 per barrel. The prospect of a deal has led to peak yields in central bank hikes and long term bond yields receding as the crisis finishes its third month. The US Strategic Petroleum Reserve, which has considerably lessened the impact, is now drawing down rapidly. This means we are entering a period where the stakes are high for Trump to seal a deal. An underpriced risk is for no deal and a protracted resumption of hostilities as the driving season approaches. A potential second leg of energy spike could ensue with a heightened risk of second round effects. This would drag the Fed towards more hikes than the one currently being priced in the market by March 2027 FOMC.
The portfolio added 2 new trades; 1 trade was exited, and 1 trade stopped out.
Curve positions added -4bp to performance. Negative trades in EUR Bund and GBP curve flies along with JPY long end flattener detracted while the US WNZ5 basis along with UK linker forward steepener were the main contributors.
Duration was positive +38bp, mostly coming from a long position in short end GBP which rallied on softer data and partial profits were taken.
FX positions were negative -1bp as currencies were sidelined over the month.
Inflation positioning resulted in a -1bp over the month, mainly due to EUR HICP outlook lowering more than US CPI.
Spreads positions were up +34bp. All due to 15yr JGBs outperforming 7yr JGBs on relative spreads to matched maturity swaps and our long position in GBP UKT implied forward spread contracted.
Volatility positions lost -6bp. The largest profit was GBP 30yr maturity vol underperforming equivalent in EUR, however this was offset by CADUSD FX vol subdued and EURJPY vs EURSEK as SEK continued to be the most volatile G10 currency of the month.
Cross Currency Interest Rate positions were a draw of -33bp. The draw came from stopping out of long dated JPY rate longs vs EUR and USD rates shorts, additionally AUD forward rates underperforming vs NZD
