Connor Godsell discusses the drivers of fixed income markets in the 4th quarter of 2025, what impacted the performance of the team’s funds and changes they made over the period.
Connor [00:00:11] Q4 was in many ways similar to the rest of 2025, marked by domestic politics, geopolitical developments, and inconsistent macroeconomic data trends. Against that backdrop, government bond markets were volatile. Credit spread stayed very tight, and returns were helped more by yield and carry than by big changes in credit valuations. Starting with the UK, bonds began the quarter strongly as yields fell. Markets welcomed softer inflation, especially in services and food. And wage data that came in below the Bank of England's estimates. November, however, was a bit choppier, largely because of the build-up to the autumn budget and constant speculation in the media around it. The Bank of English held interest rates steady, but some commentary hinted that another cut could be coming. When the fiscal announcement itself arrived, investors focused on what it signalled about discipline. The OBR numbers showed meaningful headroom built up under the fiscal rules, and that helped keep market concerns contained. Into December, attention returned to the data. UK activity looked a little bit weaker. October GDP contracted slightly, and inflation fell reasonably sharply. The Bank of England then delivered a 25 basis point cut, but by a narrow vote margin and flagged that inflation and wage risk hadn't fully disappeared. UK 10-year yields ended 2025 just below the 4.5% area. In the US, politics and data disruptions mattered greatly. A government shutdown delayed key releases to data, while renewed tariff announcements and worries around geopolitical disruptions in various regions added additional uncertainty. When inflation data did eventually arrive, it supported a 25 basis point cut, which the Fed delivered, though Chair Powell made it clear that future easing wasn't automatic. Later in the quarter, somewhat softer data, like weaker manufacturing and retail indicators, helped to push yields lower. Then by December, the Fed cut again by another 25 basis points and upgraded growth forecasts alongside this while also starting T-bill purchases, although these were framed more as a reserve management tool than direct quantitative easing. Despite some uncertainty in the labour market data, US 10-year yields finished the quarter close to where they started at and around 40 basis points lower than the start of 2025. Moving over to the euro area, things moved from a pace of relative calm to a little bit more of a cautious tone. October was relatively steady, even with the political noise in France, helped by inflation coming in near target and the ECB holding rates steady, but by December that tone had shifted somewhat. Former ECB staff projections on growth and inflation, alongside some hawkish commentary from members, pushed yields higher, and 10-year Bunds finished the quarter well above their October starting levels, and close to their highs of the year, around 2.9%. Throughout Q4 we maintained a strategic long duration position implemented through UK gilts. This was a key contributor to performance in the fourth quarter, as UK 10-year yields fell and the Fund outperformed the benchmark. At the start of October, we were about one and a quarter years long versus the benchmark, but as yields moved toward the lower end of the range that they'd held for most of the year, we trimmed that position down to one year long and held it there for the rest of the period, staying positioned for the potential of yields to fall further while managing that volatility. In terms of credit, markets remained very resilient. Technical support was strong, corporate fundamentals were generally still solid, and default expectations stayed low. Spreads ground tighter, leaving the Sterling Corporate Index close to its historic tights. Because we were modestly underweight spread duration during that time, credit was a small drag from performance as spreads tightened. Security selection also drew back from performance a little bit, led by utilities and some financials exposure, including volatility around our position in Orsted and strength in some of the names that we deem uninvestable on sustainability grounds. During the quarter, we took part in attractively priced new issues and made a few adjustments to existing holdings. Overall, the aim was to improve portfolio efficiency, adding spread risk selectively and optimising across capital structures, allowing us to take opportunities where pricing seemed compelling. On the sustainability front, engagement remains a key priority. This quarter, we sharpened our focus on artificial intelligence, both through broader initiatives, like the World Benchmarking Alliance and the AI Company Data Initiative, and through targeted discussions with companies we hold to understand how they are using AI and what it means for their workforces. This is an item we're going to take forward into 2026.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- Holds Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
