- Investment Director
Sweden, Institutional
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Welcome to October’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
- Government bond yields fell early in October amid rising trade tensions and renewed concerns about US regional banks but later rebounded as central banks signaled a more hawkish stance. Long-dated bonds rallied throughout the month on investors’ increasing confidence that a significant, permanent move higher in inflation would be avoided.
- The US Federal Reserve (Fed) cut interest rates by 25 basis points at its October meeting. Markets continued to price a soft landing for the US economy, with futures implying odds of roughly 65% for another cut in December. The European Central Bank kept policy rates unchanged at 2%, despite marginally higher-than-expected growth and inflation. The Bank of Japan also remained on hold, with a rate hike only fully priced in by markets in April 2026.
- Following Fitch’s downgrade in September, S&P downgraded its sovereign credit rating for France to A+ (Stable) from AA- (Negative) in an unscheduled rating action, three days after Prime Minister Sébastien Lecornu’s reappointment. The market reaction was muted, with France’s political deadlock largely priced in; French 10-year yields rose slightly, widening spreads versus Bunds.
- The US government shutdown — the longest in history — is straining the US economy, with delayed federal pay and suspended food assistance programmes affecting consumer spending. Policy uncertainty is slowing job growth and hitting sectors like housing and trade.
What are we watching?
- Trouble brewing in private credit? Concerns are mounting in private credit markets as recent bankruptcies and headline risks have exposed vulnerabilities in underwriting standards and transparency. The collapse of firms like Tricolor Holdings and First Brands Group has highlighted the fragility of highly leveraged, privately held companies, raising alarm bells about the quality of lending and the opacity that can mask poor underwriting practices. While public credit markets remain relatively stable, the rapid growth of private credit has led to increased dispersion in performance and heightened scrutiny from investors and regulators. Regulatory bodies are responding with calls for greater transparency and enhanced reporting, but the sector’s complexity and interconnectedness remain largely untested through market cycles. We are closely monitoring the risks and opportunities in this dynamic asset class.
- AI funding for infrastructure is evolving quickly, with demand for AI-driven technology and the resources to power it far exceeding supply. Some market estimates suggest that global data centre capacity could increase sixfold by 2030, requiring around US$3 trillion in investment. We’re currently witnessing a shift towards credit markets as a key source of capital for AI infrastructure. Recent deals have showcased creative solutions, with large, high-quality issuers leveraging the depth of demand in the public bond market to finance data centre expansion. The public investment-grade corporate bond market seems well poised to become an important venue for financing, given its ability to absorb a significant uptick in financing in the last two months alone.
- Debt sustainability. The sustainability of budget deficits is top of mind amid rising government debt levels, and countries that lose market confidence face growing financial pressure. Policymakers in major economies have increasingly turned to fiscal stimulus, delivering the most significant fiscal easing since 2010, outside of the pandemic response. The key takeaway: less economic integration and more activist fiscal policy will not only push long-term bond yields higher but also lead to shorter, more volatile cycles. We expect divergence across countries and regions to become even more pronounced in 2026.
- Central bank independence and expectations. 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. The resulting policy disconnect could be exacerbated by governments encouraging central banks to take decisions that support stimulative budget deficits. With this in mind, understanding central banks’ reaction function to both political and economic developments is crucial.
- Goldilocks or inflation comeback? Nominal global growth remains strong and inflation is subsiding, albeit still above the 2% target in most developed economies. Yet policymakers remain firmly accommodative, with plentiful global liquidity, lower equity and bond volatility and expansionary fiscal policy. Markets appear to be seeing through the inflationary supply shocks that could hit the global economy in the form of tariffs, China’s industrial policy shifts and increasingly less efficient global supply chains. If AI-driven productivity growth does not materialise and China’s excess capacity is reduced, we could see an acceleration in inflation across the world, which investors are not pricing.
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 that have the potential to shine during these periods or unconstrained strategies that are able to navigate the late cycle by allocating across different sectors.
- In a still volatile and uncertain market environment, we see core fixed income, whether aggregate or credit strategies, as increasingly attractive 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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