Fixed Income Monthly - October 2025

The Fixed Income Monthly provides a forward-looking summary of the medium-term views from Fidelity’s Fixed Income team. Our investment approach is multi-strategy, with portfolio managers given clear accountability and fiduciary responsibility for all investment decisions in a portfolio. Given this portfolio manager discretion, there may at times be differences between strategies applied and the views presented in this document. We believe in managing portfolios with a mix of active investment strategies, including top-down and bottom-up, such that no single strategy dominates risk.

Outlook

The shutdown of the US government is naturally a concern for markets as we will likely see delays in economic data and potential disruption to non-essential government services. This caution has led us to be broadly neutral on US rates, although we feel that there may be some opportunity in going underweight here while the economy continues to grow at persistently strong rates. For the time being we are not expressing this view as the potential for significant economic disruption in the short term, while unlikely, could be supportive of US duration.

The Atlanta Fed’s GDP Nowcast, which attempts to present the current growth rate of the US economy based on a number of indicators, is currently tracking at around 3.8% - this does not bode well for the market’s pricing of rate cuts.

Atlanta Fed GDP Nowcast tracking at nearly 4%

Over the summer we added to our duration exposure in the UK where we felt the selloff in long-dated bonds provided an attractive entry point. While we’ve trimmed this slightly since, we still maintain a positive view in sterling rates.

Many developed market economies, including the UK, have experienced curve steepening this year as the market attempts to digest record levels of supply. We think this has explained most of the move in gilts, rather than any idiosyncratic story relating to the nation’s finances, which are constrained like most other G7 countries with the exception of the US and Germany.

Supply factors should also support duration as the Bank of England has now reduced its quantitative tightening programme from a rate of £100 billion per year down to £70 billion. At the same time, the Debt Management Office is forecast to reduce its ‘duration supply’ to the market, meaning it will effectively shorten the average maturity of issues due to the curve steepening we have witnessed so far this year.

Gilt duration supply, realised and forecast

We also like UK breakeven inflation exposure as very little is priced in the swap market compared to the US which, as we have discussed before, is actually pricing in some degree of reflation. This position gives us an indirect hedge against a potential inflation spike that forces the Bank of England to maintain its relatively high policy rate.

We continue to like EM rates and FX, although we have reduced some risk due to the potential for a strong dollar in the short term if the Fed cannot cut rates as quickly as markets are expecting.

On the credit side, we are short in high yield and crossover credit based on historically tight spreads that offer very little carry. We feel there are material risks that could widen spreads but which are not adequately priced in. It’s notable that in the last 30 years, US BBB spreads at current levels have never outperformed government bonds of equivalent duration over the following two years.

Outlook

Global IG credit returned 1.08% in September with spreads retracing their limited widening moves in August, to close the month 5bps tighter. Spreads tightened into September in anticipation of a Fed cut. In the middle of the month, the Fed cut by 25bps, with the market pricing in further two cuts by the end of this year, subject to continuing weakness in labour market data.

IG spreads (bps) continue to tighten

Our positioning across global IG credit remains broadly defensive given expensive credit valuations. Tariff fears remain, with the announcement of Pharma tariffs in September, but IG spreads have defied expectations and continued to inch tighter. Notably, we saw some high-quality technology names briefly trade with a negative spread to US government bonds. Given the market strength, we continue to take profits, prioritising liquidity to be able to add to our credit holdings in the event of spread widening.

New issue supply rose in September, with issuers looking to capitalise on tight spreads and limited volatility. Given the continued demand for risk assets, most new issues priced at expensive levels, but we selectively participated in the pockets of the market where fundamentals are attractive and value remains, including in autos and select financials.

US IG credit returned 1.4% in September with spreads tightening by 5bps. Corporate earnings have been resilient, with average profit margins at historically elevated levels. We expect this will provide some headroom for businesses to avoid passing on the full cost of tariffs to consumers. Idiosyncratic credit stories are increasing in US markets however, with increasing M&A and LBO activity.

We continue to see a real income squeeze for the middle-income US consumers, where wage growth is tracking lower than inflation. Along with negative US jobs data, we see risks to consumer spending, and therefore to the outlook of the US economy.

US corporate profit margins are historically elevated

Euro IG credit returned 0.38% in September with spreads tightening by 5bps. We remain underweight European duration in our Euro funds based on the view that growth will surprise to the upside. In credit, we continue to be underweight in Euro IG, given spreads are at all time tights, in this environment of elevated geopolitical risk.

Sterling IG credit returned 0.9% in September with spreads tightening by 8bps. Wary of elevated UK inflation data, we are focusing on shorter dated, high-quality names, where risk-reward looks most attractive.

Asia IG credit returned 0.9% in September with spreads tightening by 3bps. Asian markets maintained their strong performance, with robust demand for risk assets throughout September, however we have been de-risking our credit exposure, and are wary of the risk of increasing idiosyncratic stories.

Outlook

Global high yield delivered a positive return of 0.7% in September and spreads tightened by 9bps. With spreads near historical tights and all-in yields around 7.2% (US dollar hedged), the margin for error is limited. We maintain a neutral stance on GHY as carry is attractive, but we prefer balanced risk, selective security selection, and higher-quality issuers until valuations offer a more compelling entry point.

US HY returned 0.8% and spreads tightened by 4bps, led by high-quality BBs and Bs. Yields touched multi-year lows and spreads hovered near cycle tights following the Fed’s rate cut. Primary activity remains robust, marked by the highest level of new issuance in over four years as issuers took advantage of historically low yields. Non-refinancing related activity reached $15.9 billion, the highest since November 2021. Overall, credit fundamentals are strong, with low default rates and improving earnings at the higher quality end.

US HY gross issuance reaches multi-year high

After sustained market strength in Q3, spreads and yields offer limited margin for error, with CCCs (ex-distressed) in single digit spread percentile relative to history. Additionally, technicals appear less supportive, with new issues increasing and fallen angel downgrades beginning to outpace rising stars. We are shifting from neutral to slightly negative on US HY as factors such as delays in rate cuts, fiscal pressures, persistent inflation, and tariff impacts could push spreads wider.

European HY delivered positive returns of 0.5% and spreads tightened by 8bps. Spreads were steady early in the month amid firm inflows but tightened later as yields eased. Higher quality bonds were resilient while CCCs lagged, reinforcing decompression and dispersion trends. As valuations are rich and much of the performing universe is priced close to perfection, we stay selective, focusing on strong balance sheets with credible deleveraging paths.

EHY remains partially insulated from broader macro risks, even as we begin to see mild deterioration in fundamentals among European corporates. Banks are a clear safe harbour, supported by solid earnings, investor friendly LMEs and ongoing positive rating actions. Overall, we maintain a neutral stance on EHY as fundamentals and technicals remains robust. EHY’s lower duration also provides resilience against government bond volatility. However, we see limited scope for further spread tightening without a distinct shift in the macro narrative.

EHY: Lower duration versus other asset classes

Asian high yield returned 1.0% in September. Spreads tightened across the region and yields eased, reflecting firm technicals and steady demand. AHY remains an all-in yield asset class – displaying high coupons and low duration. The universe is largely domestically driven with limited exposure to global cyclicals, which helps dampen external shocks. We stay neutral on AHY and focus on idiosyncratic security selection using carry as the foundation of returns while staying vigilant about potential macro and credit headlines.

Outlook

Emerging market debt delivered positive returns in September, with hard currency sovereigns leading performance (+1.8%), followed by local currency bonds (+1.4%) and hard currency corporates (+1.0%). In hard currency debt, tighter spreads and a rally in US Treasuries supported performance. Fed easing expectations and lower US real yields supported local bonds performance, reinforcing sentiment despite global uncertainties.

Dispersion in commodity prices offers opportunities

Within sovereigns, Argentina bonds underperformed sharply following the Buenos Aires provincial midterm elections, which cast doubt on the government’s ability to secure political support for fiscal and structural reforms. The outcome heightened concerns over governability and policy continuity, leading to a rapid repricing of Argentine risk despite the more supportive environment for emerging markets overall.

More broadly, EM hard currency debt has been resilient through 2025, underpinned by Fed easing, moderate oil prices, and rating upgrades in select issuers. Inflows into the asset class have resumed, and funding conditions are manageable. However, valuations are increasingly tight, with spreads near multi-year lows and little recession risk priced in. We maintain a neutral stance, recognising decent fundamentals but emphasising the importance of selective positioning across countries and curve segments.

We continue to be overweight on EM local duration, where the risk-reward remains more favourable. Inflation is trending lower across much of the EM universe, real yields remain elevated, and many central banks still have room to cut rates further. Having started their easing cycles ahead of the Fed, EM central banks are now able to adjust policy, balancing growth concerns with disinflationary progress. Renewed inflows into local bond funds after years of under-allocation add further support, while long-end EM rates are expected to remain resilient even with some steepening of the US curve, given that much of the move is driven by lower real rates.

We see value in Peru, South Africa, and Hungary, where attractive carry and credible policy frameworks should support performance along with some frontier markets, supported by carry, to benefit from the structural dis-inflation stories in Egypt and Turkey.

EM FX carry has been supportive

We are overweight EM currencies, with resilient global growth, Fed easing, and subdued volatility providing a favourable backdrop. Strong carry and supportive terms of trade for commodity exporters continue to underpin performance. Latin American currencies remain well supported, while select EMEA high yielders offer additional opportunities. Improving external balances reinforce the positive backdrop.

Although renewed dollar strength as US markets reassert their exceptionalism remains a risk, attractive valuations, good fundamentals, and strong carry support should sustain investor demand for EMFX. 

• Fixed Income Monthly - September 2025
• Fixed Income Monthly - August 2025
• Fixed Income Monthly - July 2025
• Fixed Income Monthly - June 2025
• Fixed Income Monthly - May 2025
• Fixed Income Monthly - April 2025
• Fixed Income Monthly - March 2025