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On October 1, the U.S. government entered a shutdown that stretched through month-end and into November. Beyond its immediate drag on activity, the greater casualty was information: the data flow that markets and policymakers depend on to gauge the health of the economy largely went dark.
Of the three pillars investors rely on to assess U.S. conditions—employment, inflation, and business sentiment—only about half the usual indicators arrived. The Bureau of Labor Statistics (BLS) never released its employment report, and the Bureau of Economic Analysis delayed the PPI, PCE, and GDP data. The Consumer Price Index was published only because a small BLS team finalized pre-shutdown inputs needed to index Social Security benefits. Privately compiled Institute for Supply Management (ISM) business surveys were among the few major data points to reach investors on time.
Despite the data blackout, markets pressed on—and so did the Federal Reserve, navigating the same information vacuum. The Fed delivered a second consecutive 25 bp rate cut, lowering the target range to 3.75%–4.00%. Yet Fed Chairman Jerome Powell struck a notably cautious tone, dampening expectations for further near-term easing and prompting a brief reversal in the Treasury rally that had preceded the October 29 FOMC meeting. Even so, 10-year yields ended the month 7 basis points (bps) lower, and the curve flattened modestly.
With the shutdown still unresolved at month-end, the outlook has grown murkier. The Fed’s case for easing rests on an assumed cooling in labor markets—an assumption now difficult to verify. Inflation, while softer in the delayed CPI release, remains above target. The central bank continues to operate using its own surveys and projections, while private-sector indicators like ADP employment and Challenger job-cut data fill only part of the gap. October was effectively a “50% data month,” and with ongoing disruptions, November may fall closer to 40%—leaving investors and policymakers to navigate with less visibility than at any time in recent memory.
At moments like this, another Chair Powell—General Colin Powell—offered enduring guidance on decision-making under uncertainty:
“Use the formula P = 40 to 70, in which P stands for the probability of success and the numbers indicate the percentage of information acquired… Once the information is in the 40 to 70 range, go with your gut.”
It’s advice the Fed—and markets—may find increasingly relevant in the weeks ahead.
Elsewhere, information scarcity wasn’t an issue. Most major developed bond markets traded with a dovish bias, mirroring the U.S., except Japan, which remains on a tightening path. The UK-led global outperformance as softer data and renewed fiscal credibility drove 10-year gilt yields down 29bps. Across the euro area, yields fell 8 bps in Germany and 15 bps in Italy even as the European Central Bank (ECB) stood pat, while Canada’s 25 bp rate cut brought it in line with the broader easing trend, though officials hinted the cycle may now be complete.
Data Vacuum Defines October; Fed Cuts Amid Uncertainty
The U.S. government shutdown created a historic data gap, leaving markets and policymakers flying half-blind. The Fed still delivered its second 25bp cut, though Chair Powell’s cautious tone cooled expectations for further near-term easing as the Treasury curve flattened modestly.
Developed Markets Steady; Policy Divergence Widens
Global yields were little changed as early risk-on sentiment faded post-FOMC. The U.S. curve steepened, while the ECB, Bank of England (BoE), and Bank of Canada held policy steady amid softer data. France’s downgrade and UK gilt outperformance highlighted regional contrasts; Japan’s new LDP leadership fueled brief volatility before stabilizing.
Emerging Markets Gain Across Hard and Local Currency Debt
Emerging market (EM) debt posted positive returns, supported by tighter spreads and local-currency strength in Chile, Indonesia, Peru, and South Africa. Inflows remained robust at $4.6bn for the month,1 while Argentina’s elections and a U.S.–China trade truce helped stabilize sentiment.
Corporate Credit Mixed; Earnings Resilient but Supply Heavy
Investment grade spreads were marginally wider as U.S. issuance surged on AI- and capex-driven supply, while Europe outperformed. High yield softened amid volatility and growing consumer concerns, though earnings remained broadly solid. Convertibles continued to benefit from the AI theme, with issuance hitting record levels.
Securitized and Municipals Outperform Amid Strong Technicals
Agency mortgage-backed securities (MBS) and securitized credit tightened modestly, outperforming corporates as fundamentals stayed firm. Residential credit led gains while ABS and CMBS held steady.
Taxable municipals advanced 1.08%, supported by light supply, stable credit, and persistent institutional demand.2
Asset Performance Year-to-Date
Asset Performance Year-to-Date
DISPLAY 1
Currency Monthly Changes versus USD
Currency Monthly Changes versus USD
DISPLAY 2
Major Monthly Changes in 10-Year Yields and Spreads
Major Monthly Changes in 10-Year Yields and Spreads
DISPLAY 3
Fixed Income Outlook
Following the Fed’s second consecutive 25bp rate cut in October, global fixed income markets are transitioning into a more uncertain phase. Chair Powell’s hawkish tone tempered expectations for additional near-term easing, and with the U.S. government shutdown delaying key economic releases, visibility into growth and inflation trends remains limited. The Fed—and markets—are now navigating with partial information, heightening the potential for short-term volatility and reinforcing the need for flexibility and selectivity across portfolios.
Globally, most developed bond markets have adopted a more dovish bias in line with the U.S., while Japan remains on a gradual tightening path. The UK outperformed on improving fiscal credibility and softer data, and euro area yields moved lower as the ECB maintained a steady policy stance. Canada’s 25bp rate cut aligned it with the broader easing cycle, though officials signaled a pause ahead. These diverging policy paths support maintaining a neutral duration stance overall, with selective curve-steepening positions and regional relative-value opportunities, particularly in Australia and Canada.
Credit markets continue to benefit from resilient fundamentals, though tight valuations and increased issuance argue for a selective approach. Investment grade credit offers stable carry and limited downgrade risk, while high yield valuations remain demanding but supported by strong earnings. Securitized products remain attractive given solid collateral performance and favorable technicals—especially in agency MBS and residential mortgage credit—though caution is warranted in consumer ABS and certain CMBS subsectors. Emerging markets retain an appealing combination of high real yields and reform-driven momentum, while country-level differentiation will remain key. Taxable municipals continue to offer a compelling yield premium over Treasuries and corporates, supported by light supply and healthy institutional demand. Bank loans offer attractive income despite tight spreads, supported by strong CLO demand and limited new supply, though price appreciation may be capped near intrinsic value and volatility remains elevated amid macro uncertainty.
Overall, carry and income generation should remain the dominant drivers of fixed income performance through year-end. With policy visibility constrained and spreads near historical averages, disciplined security selection, sector diversification, and a focus on quality will be essential as investors navigate the closing months of the cycle and the transition toward 2026.
Developed Market Rate/Foreign Currency
Monthly Review
Developed market interest rates fell in early October before retracing higher toward month-end. On balance, 10-year yields across major markets ended little changed, though curve flattening persisted. Early in the month, risk appetite improved as a lull in U.S. data dampened both realized and implied volatility. The delayed September CPI—the sole major release—showed softer inflation, helping the S&P 500 reach new record highs amid rising expectations for monetary easing.
The October FOMC meeting proved the month’s inflection point. The Fed cut rates by 25 bps and announced plans to end quantitative tightening, but Chair Powell’s unexpectedly hawkish tone—stating a December cut was “not a foregone conclusion”—prompted a repricing. Markets now assign roughly a two-in-three chance of another cut in December, down from near-certainty a week earlier. Ten-year Treasury yields briefly fell below 4% before rebounding above. Late in the month, the U.S. reached trade agreements with key partners, including China (after a brief early-October escalation) and South Korea.
In Europe, attention centered on France, where Prime Minister Lecornu’s proposal to suspend pension reform helped ease tensions. Nonetheless, S&P’s downgrade of France’s sovereign rating to A+—citing persistent deficits and political fragmentation—reinforced fiscal concerns. Across the euro area, October PMIs, particularly from Germany, provided reassurance on growth momentum. The ECB left its deposit rate at 2%, calling policy “in a good place” while emphasizing data dependence amid ongoing uncertainty.
In the UK, softer wage growth and easing food inflation prompted markets to reassess the BoE’s path, with the probability of further rate cuts before year-end increasing. Fiscal signals ahead of the Autumn Budget—including renewed commitment to consolidation—helped compress fiscal risk premia and supported gilt outperformance. The 10-year gilt yield fell 27 bps over the month.
In Japan, the LDP leadership election delivered an unexpected victory for Sanae Takaichi. Initial market concerns about fiscal expansion and pressure on the Bank of Japan’s independence faded following the formation of a new LDP–Ishin coalition.
FX markets reflected shifting Fed expectations and late-month guidance. The U.S. dollar strengthened broadly after the hawkish FOMC meeting, with the Bloomberg Dollar Index up 1.5%.3 Most majors weakened against the dollar, while high-beta and EM carry currencies generally underperformed
Outlook
We remain neutral on duration across developed markets outside Japan, while maintaining selective cross-market positions. We continue to see relative value in Australian government bonds versus New Zealand, though we have recently reduced long positions in Canadian and European duration against the U.S. In the U.S., we retain curve steepeners in Treasuries but have trimmed similar exposure in Bunds. We have also added to positions in TIPS inflation breakevens.
In Japan, we maintain long positions in inflation breakevens and have increased duration shorts in anticipation of continued yield normalization. In FX, we remain short the U.S. dollar against a basket of mainly high-beta currencies, reflecting our view that recent dollar strength is unlikely to persist as policy divergence narrows.
Emerging Market Rate/Foreign Currency
Monthly Review
Emerging market debt delivered positive returns in October across both hard and local currency segments. Despite a modestly stronger U.S. dollar, the local currency index advanced, supported by gains in the Chilean peso, Indonesian rupiah, Peruvian sol, and South African rand. Sovereign and corporate spreads tightened, while lower U.S. Treasury yields—following the Fed’s 25bp rate cut—added to the supportive backdrop. In Argentina, mid-term elections resulted in a decisive victory for President Milei’s party, reinforcing his political mandate. Meanwhile, the U.S. and China reached a trade truce under which the U.S. reduced average tariffs to 47%, and China agreed to increase soybean imports, suspend rare earth export restrictions for a year, and impose stricter controls on fentanyl trafficking. The asset class continued to see strong demand, recording $4.6bn in net inflows during October, including $1.7bn into hard currency funds and $2.9bn into local currency funds.4
Outlook
Fundamentals across emerging markets remain solid, underpinned by ongoing reform efforts in many countries and generally healthy macro balances. Valuations are still attractive—particularly in local markets—where currencies appear undervalued and real yield differentials versus developed markets remain compelling. The broader backdrop is supportive, with expectations of a softer U.S. dollar amid persistent fiscal spending and accommodative policy sustaining investor demand for EM assets. That said, we believe performance is likely to remain differentiated, making country-level fundamentals and policy direction key drivers of relative value.
Corporate Credit
Monthly Review
Investment grade credit had another constructive month in October, supported by solid fundamentals, resilient earnings, and continued demand for carry, though sentiment turned more cautious amid idiosyncratic headlines and expectations of increased AI- and capex-related supply in the U.S. Global IG spreads finished 2 bps wider, with U.S. IG underperforming (+4 bps to +78 bps) and European IG outperforming (–2bps to +77bps).5 In the U.S., Financials and Industrials saw mild widening, while in Europe, Industrials—particularly autos, lodging, and retail—led gains; banks outperformed while insurers lagged. Subordinated financials and hybrids tightened modestly. Q3 earnings were broadly resilient: banks continued to post strong revenues and cost control, with limited credit deterioration, while non-financials generally beat lowered expectations. M&A remained active, led by the U.S., with large transactions in utilities, beverages, and banking, and notable telecom activity in Europe. Technicals stayed supportive in Europe, where €48bn in new issuance was well absorbed (YTD €648bn, +8% YoY), while heavy U.S. supply ($161bn, record October; YTD $1.51tn, +6% YoY) weighed modestly on spreads as inflows remained robust.6
Performance in U.S. and global high yield markets moderated in October amid rising volatility. Concerns over consumer resilience at the lower-income end, renewed trade tensions with China, and unexpectedly hawkish remarks from Fed Chair Powell weighed on sentiment. Primary issuance declined sharply month-over-month—though to seasonally typical levels—while retail demand for leveraged credit softened. Market dispersion increased alongside a modest rise in the distress rate, reflecting greater differentiation across issuers and sectors.
Global convertible bonds posted another month of solid performance in October, supported by strong issuance and sustained investor interest despite elevated volatility from renewed U.S.-China trade tensions and hawkish Fed rhetoric. Returns were again driven by the AI and technology themes that have dominated recent months. The asset class underperformed global equities but outperformed traditional fixed income. Primary activity remained robust, with $11.7 billion issued in October-2.5 times the typical monthly total—bringing year-to-date supply to $137.5 billion, putting the market on track for a record issuance year.7
Outlook
As year-end approaches, we remain cautiously constructive on investment grade credit, expecting a moderate-growth environment with limited downgrade or default risk. Corporate fundamentals are solid, supported by conservative balance sheets and disciplined leverage, while technicals remain favourable despite elevated issuance and M&A activity, particularly in U.S. technology and AI sectors. We maintain a neutral duration stance and continue to favour curve steepeners amid shifting supply–demand dynamics. While carry remains the primary return driver, tight spreads and potential volatility around central bank policy recalibration argue for selectivity. We prefer issuers with strong fundamentals, low cyclicality, and resilient cash flow profiles—particularly in regions where policy remains supportive and fiscal risks are contained.
We enter the final quarter with a slightly improved yet still cautious outlook on high yield credit. While peak volatility from trade tensions appears behind us and economic growth remains supportive, softer labor data and signs of consumer fatigue argue for prudence. September CPI surprised to the downside, and corporate earnings have generally been resilient, but valuations remain tight; spreads sit roughly 30 bps above post-GFC lows despite a historically attractive all-in yield. We expect a backdrop of slower but positive growth and moderately sticky inflation. Against this, credit fundamentals remain sound, but the balance of risk suggests selectivity is essential as much of the good news appears priced in.
We remain constructive on convertible bond fundamentals heading into year-end. While trade and policy uncertainty have eased somewhat, mixed economic data—including softer job growth and firmer consumer prices—suggest a slower but still positive growth environment with lingering inflation pressures. The asset class continues to demonstrate attractive asymmetric characteristics, though rising deltas have made it more equity-sensitive as equity markets strengthened. We believe this warrants a selective approach, focusing on balanced, convex structures where valuations still offer favorable optionality for active managers.
Securitized Products
Monthly Review
Securitized credit performed solidly in October, with spreads tightening modestly and the sector outperforming most fixed income markets, particularly IG and HY corporates. Agency MBS spreads tightened 2 bps to +124 bps over Treasuries, and the U.S. Agency MBS Index returned 0.86%, extending a six-month streak of positive excess returns. The Fed’s MBS holdings declined by $16bn to $2.06tn, while U.S. bank holdings rose slightly to $2.71tn and are expected to increase as capital constraints ease.8 Money managers remained key buyers, supported by attractive valuations. Non-agency RMBS, ABS, and CMBS spreads each tightened 0–5bps amid steady fundamentals and manageable credit performance. RMBS benefited from solid household balance sheets, strong home equity, and low delinquencies despite subdued origination volumes. In ABS, rising consumer delinquencies among lower-income borrowers remain contained, while CMBS performance was mixed; Class B offices underperformed, offset by strength in logistics, multifamily, and high-end hospitality.
European securitized spreads were largely unchanged and remain tighter than comparable U.S. assets, prompting gradual rotation toward U.S. opportunities. Overall, securitized credit continued to benefit from firm fundamentals, resilient collateral performance, and strong technicals, even as issuance levels in ABS ($40.4bn), CMBS ($17.3bn), and RMBS ($19.4bn) remained broadly stable.9
Outlook
We expect U.S. Agency MBS spreads to continue tightening as attractive relative valuations draw inflows from banks and value-oriented investors. While some of this adjustment occurred in October, we see further room for spread compression as the Fed nears the end of its rate-cutting cycle in 2026. Broader securitized credit spreads are likely to hold near current levels, as the credit curve has flattened materially year to date, leaving limited room for additional tightening absent a more pronounced rally in Agency MBS.
We anticipate near-term returns will be driven primarily by carry, with yields across the sector remaining compelling. Elevated rate levels continue to pressure household balance sheets, leading to stress among lower-income borrowers in consumer ABS, while commercial real estate remains challenged by high financing costs despite some easing. In contrast, residential mortgage credit remains our preferred sector, offering strong fundamentals and favorable risk-adjusted returns, particularly in higher-yielding tranches. Overall, Agency MBS valuations remain attractive both versus investment-grade corporates and relative to historical averages, underpinning our positive view on the sector.
Taxable Municipals
Monthly Review
Taxable municipals gained 1.08% in October, extending year-to-date returns to 7.58%. Performance modestly lagged tax-exempt municipals (+1.24%) but remained strong relative to other fixed income sectors, outperforming Treasuries (+0.80%) and investment-grade corporates (+0.92%). Long-duration taxable munis (+1.40%) outperformed intermediates (+0.62%) amid a mild bull flattening, as five-year and thirty-year Treasury yields declined 3bps and 6bps, respectively. Early-month gains reflected softer labor data outweighing persistent inflation expectations. The Bloomberg Taxable Municipal Index ended the month yielding 4.78%—approximately 85-90 bps above duration-matched Treasuries and 20–25 bps over similarly rated corporates.10 Spreads tightened slightly as investors continued to favor high-quality spread products, underscoring strong relative value and stable demand.
Outlook
Despite the Fed’s second consecutive 25bp rate cut in October, Chair Powell’s hawkish tone tempered market optimism, leaving uncertainty around a potential December move. With limited data during the government shutdown, investors leaned on private indicators showing a mixed labor backdrop and sticky inflation. A resumption of data releases in November should clarify the macro picture and help recalibrate expectations for growth and policy.
While shifting rate expectations may create near-term volatility, high absolute yields, light supply, and resilient credit fundamentals provide a supportive backdrop for taxable municipals. The sector continues to offer meaningful yield advantages versus Treasuries and corporates, and steady institutional demand should keep valuations well anchored into year-end.
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