Coronation Global Strategic USD Income Fund

MARKET BACKDROP AND PERFORMANCE

The second quarter (Q2) saw widespread recoveries across many fixed income asset classes from the conflict-induced weakness seen in Q1. The conundrum here was that the political, and hence energy, crisis itself hadn’t found a stable solution over the same period. By the end of Q2, crude energy prices had indeed fallen back much closer to their upper ranges seen prior to the start of the Middle East conflict. But without a durable geopolitical resolution, this may not prove an end to energy instability and the multitude of downstream effects this has on growth and inflation, globally.

Against this backdrop, the Fund returned 1.24% for the quarter against the benchmark return of 1.01%.

During Q2, the Federal Reserve kept the federal funds target range unchanged at 3.50%–3.75% at both its April and June meetings, although the policy signal turned materially more hawkish. April’s decision exposed unusually sharp internal division. By June, the Fed characterised economic activity as expanding at a solid pace, supported by strong productivity and capital investment, with unemployment broadly stable. However, Middle East-related energy disruptions and other supply pressures had lifted inflation risks. The June projections reduced expected 2026 GDP growth to 2.2%, raised headline and core personal consumption expenditures (PCE) inflation forecasts to 3.6% and 3.3%, respectively, and increased the median year-end policy rate projection to 3.8%, effectively signalling one rate increase rather than the cut projected in March. Market pricing consequently shifted away from expectations of near-term easing and towards a meaningful probability of tightening before year-end. The quarter was also notable for the leadership transition from Jerome Powell to President Trump’s appointee, Kevin Warsh, who was confirmed in May and chaired his first FOMC meeting in June. Warsh immediately simplified the policy statement, removed explicit forward guidance and initiated reviews of Fed communications, balance sheet policy and the broader monetary policy framework, adding an institutional and political dimension to an already uncertain policy outlook.

The BoE held its bank rate at 3.75% throughout the quarter; June’s 7-2 vote showed a hawkish tilt, but softer energy prices pushed markets away from the aggressive hike path priced early in the quarter. The ECB held in April, then raised the deposit rate 25bps to 2.25% in June as the energy shock lifted medium-term inflation risks. Markets accordingly repriced from easing to a renewed tightening cycle. The BoJ held its policy rate at 0.75% in April, then hiked 25bps to 1.00% in June, validating a quarter-long shift toward earlier and faster normalisation.

US Treasury yields rose modestly over Q2, with the 10-year yield increasing by approximately 14 bps to 4.4%, while the 30-year yield was broadly unchanged at 4.9%. Long-dated yields moved above 5% during the quarter as the Middle East conflict disrupted energy supplies, lifted oil prices, and intensified concerns about inflation, while resilient economic activity and elevated Treasury issuance maintained upward pressure on term premia. These moves subsequently reversed as geopolitical tensions eased, oil prices fell sharply, and the associated inflation risk moderated. Nevertheless, a higher-than-expected May inflation reading and a hawkish June Federal Reserve meeting, at which policymakers materially raised their 2026 inflation and policy rate projections, limited the decline in yields. The curve consequently bear-flattened, as shorter and intermediate maturities repriced more sharply than the long end. Elsewhere in the G10, UK gilts and euro area government bonds outperformed Treasuries, as weaker growth and more benign underlying inflation supported duration, while Japanese government bonds underperformed following the Bank of Japan rate increase and continued upward pressure on domestic yields.

US Treasury Inflation-Protected Securities (TIPS) weakened materially over the period as real yields repriced higher across the curve: average five-year real yields rose from 1.3% in March to 1.8% in June, while 10-year real yields increased from 1.9% to 2.2%, driven by firmer inflation data, higher energy costs, and tariff-related price pressures, as well as a more hawkish Federal Reserve outlook. The June FOMC projections raised 2026 headline PCE inflation to 3.6% from 2.7% and the projected year-end policy rate to 3.8% from 3.4%, reinforcing expectations that monetary policy would remain restrictive for longer. Breakevens initially widened as inflation risks intensified, but subsequently compressed in June as tighter policy expectations and concerns over the durability of the growth impulse outweighed near-term inflation pressures. Overall, the quarter was characterised by sharply higher real yields and a late-quarter reversal in inflation compensation.

Emerging Market (EM) hard-currency sovereign debt rebounded strongly in Q2, with the J.P. Morgan EMBI Global Diversified Index returning 4.6% in US dollars. Performance was driven overwhelmingly by spread compression: spreads tightened by 53 bps to 235 bps, generating a 4.5% spread return, while US Treasury exposure added only 0.15%. High-yield sovereigns materially outperformed investment grade, returning 6.7% versus 2.5%, as geopolitical risk premia eased and investor flows strengthened. Ukraine, Mozambique, Sri Lanka, and Kenya led gains on IMF funding and reform-related developments, while China, India, and Malaysia lagged. Energy exporters initially benefitted from elevated oil prices, although subsequent price declines favoured importers.

EM local currency debt delivered a strong second quarter, with the J.P. Morgan GBI-EM Global Diversified Index returning 3.9% in US dollar terms. The gain was driven primarily by local bond returns, as benchmark yields declined 27 bps, while carry and modest currency appreciation provided additional support. Lower oil prices and easing Middle East risk reduced inflation premia, benefitting longer-duration and higher-beta markets. Latin America outperformed, led by Colombia and Mexico, while Hungary and South Africa also rallied on disinflation, currency strength, and improved policy or fiscal credibility. Indonesia materially lagged amid capital outflows, rupiah weakness, rate hikes and fiscal concerns. Energy importers generally benefitted more than exporters from the late-quarter oil reversal.

The US investment-grade (IG) corporate bond market delivered a positive low-single-digit return in Q2, with the Bloomberg US Corporate Bond Index gaining approximately 2%, supported by income carry and tighter credit spreads, while Treasury yields ended the period broadly unchanged. The ICE BofA US Corporate Index spread narrowed by 14 bps, from 90 bps at end-March to 76 bps at end-June, reflecting resilient corporate earnings, healthy balance sheets, and improving risk sentiment as Middle East tensions and energy pressures eased. Demand remained robust despite elevated supply, underpinned by attractive all-in yields and continued institutional inflows. Year-to-date US corporate issuance reached $1.52 trillion, 28% above the prior comparable period. Financials and technology-related issuers featured prominently, with AI infrastructure investment driving substantial borrowing. Overall, strong technical conditions and carry offset rate volatility, although historically tight spreads left a limited valuation cushion against weaker growth, renewed inflation, or further heavy issuance.

The US high yield (HY) corporate bond market delivered a 2.5% total return in Q2, extending its run of positive quarterly performance. The ICE BofA US HY Index spread tightened by 53 bps, from 328 bps at end-March to 275 bps at end-June, with coupon income and spread compression more than offsetting volatility in base rates. Performance was initially supported by a reversal of the Q1 risk-off move associated with the Iran conflict, followed by resilient US employment and corporate earnings, easing recession concerns, and encouraging renewed demand for credit. The market’s comparatively short duration, high starting yield, and improved average credit quality remained important defensive features. However, quarter-end spreads were historically tight, leaving limited compensation for adverse developments. Strong technical demand, manageable refinancing requirements, and subdued expected defaults supported valuations, while geopolitical risk, energy-driven inflation, and a more hawkish Federal Reserve remained the principal risks.

Global listed property rebounded strongly in Q2, with the FTSE EPRA Nareit Developed Index delivering a 9% total return, lifting its first half gain to 10.2% from just 1.0% at end-March. Performance was highly differentiated: North America led, reaching 17.3% year-to-date, while Developed Europe was broadly flat at 0.5% and Developed Asia declined 4.0%. US equity REITs gained approximately 11% during the quarter, supported by resilient operating fundamentals and attractive income yields. Sector leadership was concentrated in lodging, specialty assets, and AI-linked data centres, which recorded first-half returns of 42.8%, 34.1%, and 33.2%, respectively. Offices and healthcare also rallied sharply in June. Europe’s subdued aggregate return masked firmer retail performance and renewed corporate activity, including takeover interest in discounted UK logistics assets. Asia remained pressured by geopolitical risk, energy-import exposure, and higher financing sensitivity, although regional data centres materially outperformed.

FUND ACTIVITY

Individual security selection activity ensures that recycling across the Fund’s core holding of high-quality, short-dated corporate debt is an ongoing feature at all times and in all environments.

Investors may recall that the Fund had positioned across a range of opportunities involving select duration exposures, inflation-linked instruments, and in particular, listed property exposures prior to the advent of the crisis in the Middle East. The Fund was running low aggregate risk across all its opportunity vectors as the crisis burst onto the scene. Thus, with the combination of ample liquidity and abundant risk capacity, the advent of the generalised risk-off event was one that the Fund could use to increase risk-taking, rather than seek enhanced risk mitigation measures. The bulk of the Fund’s activity in March was in accumulating spread assets that had cheapened. However, while many global fixed income markets did experience quick and sharp weakness, these were from especially rich levels and while subsequent cheapening was useful, it wasn’t overwhelming. The net result was that, even as the Fund opportunistically added risk in the immediate aftermath of the advent of the crisis in the Middle East, the extent of weakness across global fixed income markets hadn’t reflected enough of the potential downsides perceived as within reasonable bounds to warrant taking larger positions.

For many risk asset classes, especially spread products, the apex of weakness generated by the conflict actually occurred in Q1. Thus, even as the contours of the conflict were undecided, and a resolution wasn’t properly cemented down (as seemingly remains the case), many risk assets recovered quite rapidly in the opening weeks of Q2 and in some instances regained their extreme levels of overvaluation that were briefly obtained in later part of 2025/early part of 2026. This was a difficult fundamental landscape to navigate, as monetary policy and long-rate uncertainty continued to persist, even if spread products rallied strongly, often supported by reasonable concurrent macro and corporate fundamental data points.

For the Fund, this ambiguity posed less of a conundrum. With valuations having swung back to unequivocally stretched levels across most corporate credit markets globally, the Fund’s processes emphasised more opportunities to sell back to the market than accumulate spread assets. Hence, the Fund ended Q2 with a conservatively positioned credit portfolio, even as interest rate and listed real estate opportunities continued to provide for interesting value-adding propositions. Once again, the flexible disposition of the Fund proves advantageous. While significant portions of the strategically most beneficial investment opportunities available to the Fund are out of bounds due to elevated valuations, there remain plentiful other avenues for adding value and diversification. The result is that the Fund’s prospects for achieving its required performance objectives, with a highly optimised risk profile, remain strong.

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