Liontrust GF Sustainable Future European Corporate Bond Fund

Key takeaways

• UK, US and European bond markets were shaped by softer data, political developments and shifting rate expectations, with central banks cutting rates amid ongoing uncertainty.
• Volatility increased around fiscal and political events, but inflation trends eased and bond yields generally finished the quarter below earlier peaks.
• UK gilts were the second-best performing major sovereign market, while Credit remained resilient through Q4 despite intermittent political and fiscal headwinds.
• We remain constructive on the outlook for corporate bonds going into 2026, with returns likely to be driven predominantly by carry rather than further material spread compression.

Performance

The Fund returned 0.2%* in euro terms over the quarter, in-line with the 0.2% return from the Markit iBoxx Euro Corporates Index comparator benchmark. 

Market commentary

Europe

Euro area bonds moved from calm to cautious over the quarter. In October, markets steadied despite France’s political whiplash – an abrupt prime ministerial resignation and swift reappointment – while ratings pressure (S&P downgrade to A+, Moody’s outlook to negative) was offset by mildly firmer Q3 GDP at the euro level (+0.2% q/q), headline inflation near target (2.2%, core 2.4%), and an ECB hold at 2.00%. Ten-year Bund yields eased 7 bp to 2.64% and the French–German spread narrowed. Moving into November, price action was subdued as investors modestly reassessed the outlook: Eurostat confirmed October HICP at 2.1%, the November preliminary estimate nudged up to 2.2% with core steady at 2.4%, and ECB minutes characterised risks as “fairly balanced”, keeping policy-on-hold expectations intact. Bund yields finished only around 6 bp higher near 2.70%, with intra-euro spreads well behaved. 

By December, the tone turned more US-like: the ECB again kept rates at 2.00%, but a firmer policy backdrop emerged as staff projections were upgraded (growth to 1.2% from 1.0%, inflation to 2.2% from 1.9%) and hawkish commentary (e.g. Schnabel) coincided with largely in-line inflation (headline 2.1%, core 2.4%). Alongside global rate weakness, this pushed 10-year Bunds up 17 bp to 2.87%, leaving them around 50 bp higher year-to-date, while French spreads remained broadly unchanged despite unresolved budget questions.

UK

UK bonds began the quarter with notable outperformance as yields fell, supported by a combination of softer economic data and fiscal policy developments. A leaked story suggested the Office for Budget Responsibility (OBR) would cut its productivity estimate by 0.3%, tightening the Chancellor’s “headroom” ahead of the Autumn Statement. Meanwhile, private sector wages undershot BoE estimates and inflation surprised to the downside, notably in services and food, which was welcomed by markets.

November was more volatile amid the Budget build-up and a near-constant stream of media speculation. The Bank of England (BoE) had already voted 6–3 to keep rates unchanged, but commentary from some members, including Governor Bailey, hinted that another rate cut could be forthcoming. The data flow was soft: the labour market report disappointed, Q3 GDP growth slowed, and inflation prints were broadly in line with expectations. The biggest surprise came when reports indicated the Chancellor would no longer proceed with income tax rises, following a better-than-expected OBR forecast. Ultimately, the fiscal event – inadvertently pre-trailed by an early release of the OBR’s numbers – showed £21.7 billion of headroom under the fiscal rules, which investors read as a sign of relative fiscal discipline. Consequently, 10-year yields ended the month around 4 basis points higher at 4.49%, having been as high as 4.65% at one stage.

With Budget risks fading, focus in December returned to data and the BoE. Activity data continued to appear lacklustre, with October GDP showing a contraction of 0.1% m/m against expectations of a small expansion. Labour market data was mixed – average earnings beat expectations, but private sector regular pay slipped below 4% and unemployment rose to 5.1%. Inflation fell sharply – headline CPI to 3.2% and services to 4.4% – with clothing and food key drags. Markets were near-certain of a 25 basis point cut, which the MPC delivered (5–4 vote), albeit with cautious messaging on lingering price and wage pressures. Ten-year gilts finished 2025 at 4.54%, up 4 bps on the month and a handful of basis points below the start of the year.

US

US markets in Q4 were driven by politics, data delays, and shifting rate expectations. In October, a US government shutdown suspended key releases, while President Trump announced further tariffs on China, amplifying political uncertainty. When CPI was eventually published, it came in slightly below expectations at 3.0% for both core and headline, reinforcing expectations for a 25 bp Fed cut, which was delivered. However, Powell’s cautious remarks afterwards cautioned that further easing in December was not predetermined.

This was followed by a series of softer data – weak ISM manufacturing, lower consumer expectations, poor retail sales, and revised payrolls later in the quarter – which bolstered rate-cut expectations. There was no CPI published in November, despite the end of the government shutdown, due to the lack of data collection. In addition, growing expectations of a particularly dovish-leaning Fed Chair to replace Jerome Powell in 2026 helped push yields lower.

In December, the FOMC cut another 25 bp, upgraded growth forecasts, and began T-bill purchases framed as reserve management (not QE). Data, still distorted by the backlog, showed mixed signals in the labour market. There were signs of concentration in the jobs numbers, with most sectors losing jobs and the unemployment rate rising to 4.6%. The BLS reported a two-month CPI change rather than breaking it down into individual months, with headline and core inflation falling to 2.7% and 2.6% respectively. This uncertainty contributed to a muted market, which largely looked through the dovish print, and Treasuries traded in a narrow range. Despite this, 10-year Treasuries closed December at 4.15%, about 40 bp lower year-on-year, a clear outperformer versus many peers.

Performance

Duration

Throughout the quarter, we held a steady overweight duration position of +0.5 years relative to the benchmark, split evenly between Germany and the UK. Duration contributed positively to performance: a 20bps decline in 10‑year UK gilt yields more than offset the 14bps rise in German Bund yields, resulting in a modest but positive impact on overall returns.

UK Gilts delivered strong returns, ranking as the second-best major sovereign market. Despite inflation staying above target, softer labour conditions and easing wage pressures allowed the Bank of England to cut rates by 100bps in 2025. In contrast, Bund yields moved higher as the ECB adopted a more hawkish stance, keeping rates unchanged while lifting its growth and core inflation projections.

Credit

Credit markets stayed robust throughout Q4, even as they occasionally faced headwinds from political and fiscal uncertainties. Supportive technical factors, healthy corporate balance sheets, and low expectations for global defaults helped maintain tight spreads. The European corporate index finished the quarter nearly unchanged from Q3, but 14bps tighter than at the start of 2024—marking the tightest year‑end level seen in two decades.
Our overweight position in spread duration meant performance from credit added to the funds’ return as spreads performed well. However, the fund’s modest allocation to Bunds for liquidity and collateral purposes slightly detracted from performance as yields edged 14bps higher over that period.

Security selection and sector allocation both added to performance, with sector allocation providing the largest boost and contributions coming from a broad range of sectors. Banks delivered the highest contribution to returns, driven by our overweight position—particularly in Tier 2 securities—alongside strong security selection. Utilities also supported performance, as our overweight position benefited from the sector tightening over the quarter after having previously lagged the index.

Trading activity 

Trading activity over the quarter was selective and centred on new‑issue participation, relative‑value optimisation, and targeted reductions in specific holdings. The fund added exposure through attractively priced new issue opportunities—including issues from Inwit, Verizon, and British Telecom—often financed by trimming or replacing more expensive names. Several relative‑value switches were executed within financials, such as adjusting holdings in Barclays, Axa, and LSE, to lock in stronger spreads or improve maturity profiles. The portfolio was also streamlined by exiting positions where the risk‑return case had weakened, including BNP and The Climate Investment Funds, the latter having effectively fulfilled its role as a high‑quality gilt alternative.

Sustainability

Engagement continues to be a priority for the team. This quarter we made AI a focus point and something we wish to take more action on going forwards. We have effectively two forms of engagement going on with respect to AI - participation in broader industry initiatives; and our own targeted focus on AI's impact on the workforces of our companies. The broad industry initiatives we are involved in are the World Benchmarking Alliance (WBA) and the AI Company Data Initiative (AICDI).

We are members of the WBA's Collective Impact Coalition on Ethical AI, which has grown out of a UNESCO initiative published back in 2022 aiming to define "Recommendations on the Ethics of AI". The AI CIC publishes updated reports every year and uses a committee structure to engage with a number of companies on their AI principles, and how they are implementing them.

On the more focused side, we have drafted an email that we are planning to use as the basis for individual discussions with companies. As part of our due diligence and ongoing engagement with companies on strategic direction, we would like to gain a deeper understanding of their approach to Artificial Intelligence (AI). We are looking to arrange calls to discuss their current use of AI, practices, and future plans.

Outside of AI, we continue to react to controversies as and when they appear. Bio-bead pollution along the south coast, linked to Southern Water which we do not hold, prompted us in late December to ask each of our UK water holdings about exposure to plastic media in wastewater site. The responses we’ve received so far have been very promising, with limited to no exposure and much stronger controls than it appears Southern Water had.

Outlook 

We remain constructive on the outlook for corporate bonds going into 2026, with returns likely to be driven predominantly by carry rather than further material spread compression. We expect spreads to stay broadly range-bound, with larger spread moves not in our base case. With spreads already historically tight in many areas, we continue to retain flexibility to add selectively if volatility creates more attractive entry points.

Recent political events and shifting trade policies have contributed to increased market volatility. Despite this, we believe our high-quality corporate holdings remain fundamentally robust. If valuations become more attractive, we may look to selectively add credit exposure, though we remain prudent given the uncertain backdrop.

Fundamentals have weakened, mainly due to commodity sector pressures and cash erosion, but margins remain robust at near decade highs with defensive sectors showing resilience. Continued pressure on interest coverage is expected as refinancings continue and net interest costs increase. About 30% of the IG market’s debt matures by 2027, and refinancings will occur at higher rates. Net leverage has slightly increased, however still remains mid-range compared to the past decade. 

It is becoming more evident that outperformance will increasingly be driven by credit selection, an area where we have a strong track record. Our portfolio is tilted towards high-quality issuers offering relative value, with a notable overweight to financials – particularly banks and insurers – and resilient names in the telecoms sector.

We also see potential for capital gains should government bond yields fall, and we continue to maintain a long duration stance. Combining current credit spreads with elevated gilt yields, all-in yields above 3.5% remain compelling; the fund’s gross redemption yield currently stands at 3.6%, reflecting its high-quality investment-grade focus.

For 2026, we anticipate a low-growth environment. While inflation remains persistent and the “higher for longer” narrative prevails, we believe the UK economy may underperform market expectations. With signs of a softening labour market and weakening sentiment, we expect yields to end 2026 lower, and foresee a longer-term decline in gilt yields as the UK’s economic vulnerabilities become more apparent.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 31.12.25, A5 share class, in euros, total return (net of fees and income reinvested). Discrete data is not available for 10 full 12-month periods due to the launch date of the portfolio.