- Investment Director
Switzerland, Intermediary
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Welcome to November’s edition of Bonds in Brief, our monthly assessment of risks and opportunities within bond markets for fixed income investors. Each month, we explore material macro changes and how best to navigate the latest risks and opportunities we see within bond markets.
Key points
- Global government bond yields ended November relatively flat, though divergence continued across markets. US Treasury yields extended their decline, driven by dovish Federal Reserve commentary and the gradual release of delayed economic data, but yields climbed higher elsewhere.
- In the UK, gilts rallied after the Autumn Budget, removing one of the exogenous risks for sterling rates in the near term. While the headlines showed a £26 billion tax increase, the government has, in fact, modestly loosened fiscal policy for the next two years — by 0.2% of GDP in 2026 and 0.3% in 2027. Like many other governments, faced with market pressure to tighten fiscal policy to meet its own rules, the UK is spending more now and promising to pay back later. Projected future tightening means fiscal rules should be met, and the UK is therefore less likely to undergo a political crisis, but this is precisely because fiscal tightening will not occur in the next two years.
- Remarks by New York Fed President John Williams significantly boosted market expectations of a US rate cut in December. Although policymakers remain divided, we think the majority will favour moving the policy rate closer to neutral to preempt any additional labour market weakness.
- Japan’s government confirmed a substantial fiscal package worth ¥21.3 trillion (US$135 billion) to cushion households from inflation and boost investment and defence spending. Initially, the package will be funded through reserves, short-term bills and stronger tax revenues, limiting near-term Japanese government bond (JGB) issuance. Meanwhile, JGB yields have continued to rise, reflecting confidence in Japan’s strong nominal growth trajectory.
What are we watching?
- Russia-Ukraine deal, with an eye on inflation. US-led peace efforts gained momentum after the Trump administration revised its controversial 28-point plan into a 19-point framework following talks in Geneva. While both sides signalled cautious optimism, core disputes — territorial concessions, military caps and security guarantees — remained unresolved. If Trump forces a quick deal, territorial and military caps could leave Ukraine vulnerable to future invasion, while failure to agree risks eroding US support and deepening Ukraine’s dependence on European aid. For now, negotiations remain fragile. From a macro perspective, a resolution of the conflict would represent a significant upside risk for the European economic cycle. Equally, as new LNG supply from Qatar, the US and Australia comes online, inflation could fall more than expected. This would broaden the range of possible policy outcomes for the European Central Bank (ECB) and increase the potential for rate cuts in 2026 and 2027.
- Corporate debt issuance. November marked a historic surge in corporate debt issuance to a record US$135.75 billion as companies raced to secure funding for AI-driven infrastructure projects. Technology firms led the charge with increasingly large transactions, a trend expected to persist in 2026. Robust investor appetite has resulted in heavily oversubscribed deals and pricing well inside initial guidance, underscoring confidence in the sector’s transformative potential. While AI promises long-term growth, rapid technological shifts could shorten asset lifespans and delay commercial payoffs, posing risks to credit quality and funding stability. Looser lending standards and opaque off-balance-sheet arrangements amplify vulnerabilities, even as selective opportunities emerge for active managers. Navigating this environment requires disciplined underwriting, a focus on relative value and the flexibility to adapt as AI reshapes credit markets.
- Central bank independence. In recent years, central banks have become more focused on cushioning economic shocks than on controlling inflation. This shift is especially relevant given expansionary fiscal policy and above-target inflation in most developed economies — which creates tension between monetary and fiscal policy that could be exacerbated by governments preferring, or even pressuring, central banks to deliver decisions that support their expansionary budget deficits. No central bank has had its independence more visibly challenged than the Fed, where a new Chair is likely to be nominated in early January. The threat might be more subtle for other central banks, with the Bank of England, Bank of Japan and ECB facing the respective challenges of quantitative tightening, normalising policy and managing cross-country spreads. Eventually, the loss of central bank independence risks entrenching inflation and eroding cooperation across policymakers globally.
- Governments target maturities. The UK’s Debt Management Office (DMO) has announced that gross gilt issuance in 2026 will be £50 billion lower than this year, with significantly reduced issuance of inflation-linked and long-dated bonds. Together with HM Treasury, the DMO has also confirmed the launch of a consultation in January 2026 on expanding and deepening the Treasury bill market. This is a significant development for the back end of the gilt curve, which should benefit from this technical tailwind for some time. US Treasury Secretary Scott Bessent also confirmed potential changes to US debt issuance to reflect investor demand, noting that any shift would be gradual to avoid market disruptions.
Where are the opportunities?
- The risks of a recession remain modest, yet tariffs are also likely to add to the current inflationary impulse. Given these dual risks, our key conviction remains a focus on higher-quality total return strategies that are less constrained by benchmarks. This could include global sovereign and currency strategies (especially those that diversify US-dollar exposure) that allocate across multiple sectors.
- In a still volatile and uncertain market environment, we see core fixed income, whether aggregate or credit strategies, as increasingly appealing from both an income and capital protection perspective. All-in yields remain attractive for investors looking to derisk or diversify away from domestic government bonds, providing a potentially smoother return profile. And for European investors, high-quality income may offer an attractive avenue not just in local but also global markets.
- We think high-yield debt still offers potential, but advocate a cautious approach given market uncertainty and current spread levels. At the same time, the robust additional income potential may make high yield a good equity substitute should investors want to derisk. For all higher-yielding credit, we believe an “up-in-quality” issuer bias and careful security selection are warranted.
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