Federated Hermes: Weekly Markets Wrap Up 25 June 2026
In this week’s markets wrap up, we explore how investors are navigating political change in the UK, where the most attractive risk-adjusted opportunities can be found along the yield curve, and the continued dominance of AI-driven equity markets as technology stocks power global indices higher.
Filippo Alloatti, Head of Financials for Credit at Federated Hermes
Muted Gilts Look Beyond
Markets have responded calmly to the UK's political shake-up, with investors appearing more focused on the positives: a reduction in political volatility and the prospect of a swift leadership transition. With Andy Burnham emerging as the leading contender to replace him and potentially becoming Prime Minister by mid-July, markets are treating the development as a political event rather than a macroeconomic turning point.
The relatively muted reaction in gilt markets is particularly notable. Investors appear reassured that a rapid and orderly transition would limit political uncertainty and reduce the risk of policy disruption. For markets, clarity matters more than continuity, and a quick leadership resolution would help contain risk premia.
However, any optimism should be tempered by the fiscal realities facing the next government. The UK's public finances leave little room for meaningful spending increases, particularly with government borrowing costs remaining elevated. Any perception of fiscal loosening would likely be met with higher gilt yields, reflecting investor sensitivity to fiscal credibility following previous market disruptions.
At the same time, markets are increasingly questioning whether the Bank of England will need to raise rates at all in 2026, given signs of a cooling labour market and softer growth backdrop.
For financials, the picture remains constructive. UK banks continue to hold strong, conservatively managed CET1 capital ratios, while insurers maintain robust Solvency II positions. The real test for markets will come when details of Burnham's economic programme begin to emerge later this year.
Yulia di Mambro, Portfolio Manager for Fixed Income at Federated Hermes
Shelter and Yield Along the Duration Curve
The surge in energy prices has driven a sharp selloff in the core rates with US Treasuries, bunds and gilts now pricing 30–80 basis points higher than at the end of February, and markets pricing further hikes. The pace and scale of these moves have briefly pushed most fixed income indices into negative total return territory. Yet short duration credit is a notable exception, offering higher running yields and limited interest rate sensitivity keeping returns positive.
Longer-dated debt may appear more appealing , such as the 30-year US Treasury, but the outlook remains uncertain particularly given inflation volatility. The long end is likely to stay under pressure from US fiscal concerns and energy-linked inflation dynamics in Europe.
Against this backdrop, the 1–3-year segment seems particularly attractive. US Treasuries can yield above 4% at roughly 20 months duration, even with a further 100 basis point rise in yields, one-year returns could still exceed 2%. Extending maturities into the 5-7-year range offers only modest yield but significantly increases duration risk, leaving returns more vulnerable to rate moves and spread widening.
In this environment, shorter-duration assets offer a more resilient way to capture income while limiting downside. Until there is greater clarity on inflation, policy direction and geopolitical developments, the front end of the curve provides a compelling balance of return and risk that longer maturities struggle to match.
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes
Equities: Staying the Course
Equity markets have been increasingly narrow, and momentum driven since the trough in late March, with leadership concentrated in a handful of technology names, particularly semiconductors and memory. The set up can feel uncomfortable to investors, but it’s typical of a market being driven by a powerful structural theme. Micron’s strong results this week were an important demonstration that earnings can continue to match the hype.
In markets like this, air pockets are to be expected. Not every down day signals a rotation, or a change in leadership. Investors would do well to resist the urge to overinterpret short term moves.
Geopolitical tensions have eased, with oil drifting back toward more normal levels: one potential tail risk is reduced. Macro indicators and consumer spending data have so far been more resilient than many expected. The large capital raises have been absorbed by markets without denting sentiment. Valuations, while not cheap, still look reasonable in the context of expanding margins across the AI ecosystem.
There will of course be more volatility, and some of the laggards - particularly software – will at some point start to look oversold. But it’s important to be patient. Investors who stay focused on fundamentals and keep a long-term mindset are typically the ones who will most successfully navigate the volatility.