Key points
- Fixed income markets rebounded in October as lower sovereign yields provided a tailwind for total returns. However, ongoing concerns about AI financing needs contributed to negative excess returns across most spread sectors.
- US midterm elections. The 3 November midterm elections saw Democrats win control of the House and Senate, introducing a divided government for the rest of President Trump’s term. The result could reduce expectations for additional fiscal stimulus and limit longer-term inflation and debt risks, and potentially lower US Treasury yields. That said, uncertainty around fiscal negotiations, tariffs and regulatory policy, particularly around AI, will likely remain important for rates and risk assets heading into 2027.
- Fed holds steady as Warsh strikes softer tone. The Fed kept US rates unchanged in October. Fed Chair Kevin Warsh acknowledged financial conditions had tightened but did not repeat September’s emphasis on the need for further tightening. With growth and hiring holding up and oil prices elevated, there is scope for another rate hike, but the Fed may be willing to wait for existing policy restraint to bring inflation lower.
- AI financing concerns pressure credit spreads. Credit spreads widened for some AI-related borrowers amid concern about the debt levels needed to finance the infrastructure build-out, with investors demanding higher yields, larger new-issue concessions and stronger creditor protections. Despite leading technology companies’ generally strong balance sheets, the recent widening illustrates how the scale of AI investment can itself become a credit headwind. Repricing may, however, create opportunities at more attractive valuations and with stronger structures.
- UK Budget: near-term relief, fiscal challenges remain. The Chancellor delivered a relatively modest Budget, reaffirming fiscal consolidation. The deficit forecast for 2026 was revised higher from 3.6% to 4.2% of GDP but is expected to fall to 2.1% by 2029 – 30. This should provide near-term reassurance for gilts. However, questions remain about the credibility of the medium-term projections, which rely on significant spending restraint later in the forecast period and supportive macroeconomic assumptions.
- French fiscal concerns continue. French government bonds came under renewed pressure as budget concerns and political uncertainty pushed 10-year yields higher and widened spreads versus Germany. Unlike the September sell-off, which focused on French assets, October increasingly saw a spillover into European credit, with high-yield spreads widening as investors questioned whether fiscal consolidation could stabilise France’s debt trajectory without further weakening growth.