LO Funds
All Roads

MACRO AND MARKET REVIEW

September 2026 provided the answer to a simple question: what happens when real yields rise by 50 basis points in a single month? A move of this size in US 10-year real yields had not occurred since September 2022, in the midst of a terrible year for fixed income, and September 2026 ranks as the tenth-largest monthly increase in real yields since 1999. Two conclusions can be drawn from this episode. The first is that 2026 is not 2022. In 2022, real yields rose by 22 basis points per month on average; this year, the monthly increase has so far averaged about 10 basis points, and the rise has come in two bursts, between March and May and then again in September, rather than as a steady drift. The second is that yields started from a much higher level than in 2022. The carry embedded in bond portfolios is therefore far larger than it was then, and it absorbs part of the capital loss caused by rising rates. This is why government bond indices are down by only around 3% year-to-date, having been broadly flat before September. Should yields remain unchanged between October and December, carry alone would recoup roughly 1% of that performance over the quarter. The main driver of this rise is essentially monetary. Inflation expectations played almost no part in it: US 10-year breakevens rose by just 5 basis points over the month, while real yields rose by 49 basis points in the United States and by 21 basis points in the euro area. What changed is that markets now expect the Federal Reserve and the European Central Bank to hike policy rates higher than previously anticipated, and the monetary scenario has been repriced accordingly. Behind this repricing lies growth that continues to exceed expectations. As long as the economy keeps surprising to the upside, fixed income keeps repricing, and it takes the rest of the market with it. Equities fell over the month, but by less than fixed income, as earnings expectations continued to be revised upward: the pullback in equity prices is better explained by the rise in yields than by a deterioration in fundamentals.

In September, the MSCI World declined by 1.4%, while emerging markets lost 1.7%. In the United States, the Nasdaq gained 1.9% and the S&P 500 slipped by 0.5%, compared with a decline of 5.4% for the Russell 2000. The Euro Stoxx 50 fell by 2.4%, while the FTSE and Chinese equities declined by 2.0% and 4.7% respectively. Growth stocks held up better than value stocks, declining by 0.2% and 2.4% respectively. In sovereign bond markets, US 10-year and 2-year yields increased by 53 and 55 basis points respectively, while German 2-year and 10-year yields rose by 27 and 26 basis points. Credit markets came under pressure as the cost of funding rose, with US high-yield spreads widening by 50 basis points, Xover spreads by 27 basis points and emerging-market spreads by 28 basis points, while US investment-grade spreads widened by a more modest 10 basis points. Finally, the BCOM index was broadly unchanged, gaining 0.3%, as a 9.8% rise in energy, with oil up 5.4%, offset a 7.1% decline in precious metals. Gold fell by 6.3% as the dollar appreciated by 2.0%, with the euro and sterling losing 2.5% and 2.1% respectively - another mark of the rise in real yields.

PORTFOLIO ACTIVITY

Portfolio exposure slightly decreased over the month, declining to approximately 145%, with a reduction in the risk budget by about 10%. Allocation rotated away from cyclical assets towards protection assets. Exposure to sovereign bonds has decreased while it increased for volatility strategies. Our volatility estimates increased across most asset classes during the month, with the exception of commodities and emerging market equities. Momentum indicators continue to reflect a bullish picture, with trends remaining broadly positive for cyclical assets and negative for sovereign bonds. Our aggregate risk-appetite indicator, which had remained consistently in Risk-On territory since the beginning of the year, has started to decline and is now approaching the neutral zone. On the macro side, growth data continued to improve in September, with our global nowcaster rising above 50%. Inflation indicators remained more moderate, while inflationary pressures stayed elevated, showing no signs of a renewed acceleration. Additionally, our monetary policy signals are gradually shifting in line with improving growth.

PERFORMANCE

In September 2026, LO Funds-All Roads was down -1.3% (USD NA share class). Over the month, performance was challenged mainly by sovereign bonds, which detracted 150 bps. Heightened volatility in bond markets was captured by our volatility strategies which contributed 40 bps over the month. For credit and emerging market debt, losses were more contained, jointly detracting 20 bps and developed and emerging market equities reducing performance by 30 bps. Commodities detracted 10 bps. Additionally, our overlay strategies contributed 15 bps with carry and trend up, and macro slightly down.

OUTLOOK

The final quarter of the year is usually a positive period for markets, and clearly a more favourable one than August and September. High yields, however, make any further progress in equities harder to achieve than before, since they rule out any expansion in valuation multiples. Yet the current configuration, with growth still solid, inflation hovering around 3% and valuations that have already come down, is far from a bad starting point for the remainder of the year. From that angle, we fail to see any urgency to reduce market exposure.