Fixed Income Monthly - November 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

For over a month the US federal government has been shut down, impeding non-essential services and official economic data. The Federal Reserve cut rates by 25bps and halted QT in a move to insure against the downside economic risks from ongoing labour market deterioration and the impacts of the shutdown.

But the Atlanta Fed continues to track economic growth at near 4%, while inflation swap markets are expecting near 2.7% CPI in 2 years’ time. These signs run contrary to the narrative that the Fed will cut aggressively into 2026, and we got some hawkish guidance to support this at the meeting. Along with Fed action, supply dynamics are a concern, as the fiscal deficit remains uncomfortably large. As a result, we remain underweight US duration.

But it’s not just Treasuries we don’t like, we are actively short the US Dollar too. One reason is that the US current account deficit - the difference between imports and exports - has grown to large levels again.

Current account balance as a % of world GDP

As a twin-deficit economy, the US is exposed to the so-called ‘kindness of strangers’, where international capital flows have allowed the country to spend exorbitantly. The US Dollar has strengthened for years as international investors poured capital into the US financial complex.

This leaves financial markets in a precarious position, where a sudden stop in flows to US assets could mean US Dollars sharply correct this global imbalance. In such a scenario, we expect to see considerable weakening of the US Dollar on a trade-weighted basis, and possibly an elevated term premium in Treasuries.

Expensive US dollar is ripe for a correction

We remain short of US Dollars against a basket of EM FX. which are more attractively valued.

We remain overweight UK duration via 10-year Gilts, which have performed well in October. This is due to issuance dynamics - where QT has slowed, along with shorter maturity issuance - and the expectation of a supportive budget.

We expect the budget to be uncontroversial, including measures to modestly improve fiscal headroom. This should help Gilts further, along with a more dovish Bank of England, concerned with the UK’s weakening labour market.

In credit we remain outright short via CDX High Yield and iTraxx Crossover instruments. This is based on valuations, where we see very little upside in being long credit due to historically tight spreads.

We prefer government bond exposure across the LatAm rates complex where yields are high, and disinflationary tailwinds should support local currency duration exposure.

Outlook

Global IG credit returned 0.6% in October with spreads widening by 2bps overall. October was a tale of two halves. Initially spreads widened on fears of an escalating US-China trade tensions and concerns in the credit market following blows ups in First Brands and Tricolour. In the second half, improved trade relations facilitated a return to risk on sentiment in markets and spreads retraced towards post-GFC tights.

IG spreads (bps) continue to tighten

We maintain our broadly defensive positioning across IG credit as spreads continue to appear priced for perfection, with little room for negative shocks. We are still selling into market strength and rotating into high quality issuers, and adding single names where we believe there is potential for spreads to tighten.

US IG credit returned 0.4% in October, with spreads widening by 4bps. Although spreads ended the month wider, they remain close to historic tights and the market has now largely shrugged off tariff fears. Corporate earnings have been strong so far, and issuers continue to capitalise on historically tight spreads, including the big 4 US banks coming to market post earnings.

It's also notable that hyperscalers – the largest US technology companies - may be beginning to finance their capital expenditures on datacentres with bond issuances rather than purely free cash flow. In October, Meta issued $30bn worth of bonds, which was the largest US IG bond issuance for 2-years, and was the most demanded on record at $125bn. This was in addition to a $29bn financing deal earlier in the month.

US hyperscaler capex ($) is expected to ramp up

Euro IG credit returned 0.7% in October with spreads tightening by 2bps. We expect European growth will surprise to the upside driven by Germany’s fiscal package, and inflation will settle higher, so we remain underweight European duration. With spreads at post-GFC tights, we struggle to see how much more tightening is justified given structural differences in the economy compared to pre-GFC euphoria.

Sterling IG credit returned 2.2% in October with spreads tightening by 1bp. This strong return was mostly driven by a rally in Gilts after UK CPI printed lower than expectations. We are cautious ahead of the UK budget, with productivity downgrades contributing to a potential ~£30bn black hole. Technical support is still strong with attractive all-in yields, but when rates come down, spreads may widen. Our positioning on credit remains defensive until spreads widen.

Asia IG credit returned 0.8% in October with spreads tightening by 2bps. We maintain our neutral credit positioning, while also looking to target underperforming idiosyncratic names that we believe have the potential to tighten.

Outlook

Global high yield was broadly flat in October and spreads widening 14bps. The period was characterised by elevated dispersion across ratings and sectors, with lower-quality bonds lagging amid renewed idiosyncratic risk while BBs proved more resilient. We are neutral on Global HY as attractive carry is offset by rich valuations and late-cycle risks, warranting balanced exposure and disciplined risk management.

US HY delivered returns of 0.2% in October, as a brief bout of early volatility - triggered by single-name weakness following the collapses of First Brands and Tricolor - quickly retraced. The recovery was supported by a solid start to Q3 earnings, another insurance rate cut by the Fed, and easing trade tensions. Primary issuance slowed sharply from September’s record pace as investors grew more selective, while lighter net supply supported technicals.

US HY New issuance has eased from record levels

Given the Fed’s caution on further rate cuts and the market’s pricing of several cuts already, room for additional spread tightening appears limited if growth is resilient. Modest widening in October has left valuations more balanced, while improving earnings and easing financial conditions offer scope for selective risk-taking. We therefore move from slightly negative to neutral in US HY, recognising improved entry levels but maintaining a disciplined approach amid still-limited valuation cushion.

European HY market ended the month broadly unchanged, and spreads widened by 15bps as investors balanced shifting rate expectations with steady demand. The modest move in spreads has left valuations slightly more attractive, particularly in stressed and distressed segments. The market is bifurcated by rating quality, with BBs - around two-thirds of the universe - outperforming Bs and especially CCCs. This dispersion has offered entry opportunities and set the stage for potential spread compression as seasonal factors turn more favourable into year-end.

Technicals softened as flows eased, but limited new issuance and a supportive macro backdrop, underpinned by solid corporate fundamentals and healthy earnings, continue to anchor sentiment. In this backdrop, we have moved from a neutral to a positive stance on European HY, as improved valuations and supportive technicals create a constructive environment for selective risk-taking.

EHY: BBs continue to outperform lower-rated cohorts

Asian high yield returned 0.4% in October, and spreads widened by 21 bps. The asset class continues to display an attractive income profile, and short spread duration offers compelling total return potential. Fundamentals are benign and the technical backdrop reasonably supportive, though we may see new shorts emerge after a strong year-to-date rally. Tight spreads, however, prevent a more constructive stance at this point.

Overall, we maintain a neutral position on AHY as its appealing yield-versus-duration balance is offset by rich valuations and the potential for tactical profit taking, which call for a more measured approach.

Outlook

Emerging market debt delivered positive returns in October, with hard currency sovereigns (+2.1%) outperforming corporates (+0.6%) and local currency bonds (+0.5%). Performance in hard-currency assets was driven by tightening sovereign spreads and supportive US Treasury moves. Currency returns were slightly negative, yet risk sentiment across EM remained supportive amid portfolio inflows and resilient overall performance.

Dispersion in EM HY sovereign returns in October

Hard currency EM sovereigns extended gains in October, supported by improving macro fundamentals, investor demand and a broadly favourable global backdrop. Spreads tightened to near multi-year lows, led by high-beta issuers.

Argentina stood out, as President Milei celebrated a decisive victory in midterm elections, following a bailout package from the US. Performance, however, remained uneven across high yield sovereigns, creating opportunities for active differentiation.

Recent geopolitical developments and renewed US sanctions on Russian oil producers added further dispersion, while robust primary market conditions enabled some HY borrowers to refinance.

In Asia, new trade and tariff agreements with the US removed a key market concern, and although valuations have become richer, they are supported by strong technicals such as inflows into EM bond funds. We continue to be constructive on the outlook for hard currency sovereigns but prefer to be selective, favouring issuers with credible policy frameworks, reform agendas and sound debt management.

EM LC return decomposition

Local currency bonds advanced in October, supported by stable or falling yields and strengthening demand. Over the past year, broadly stronger currencies and lower oil prices have contained inflationary pressures allowing some central banks to reduce policy rates.

We think the higher-yielding Latin American markets still offer value, with attractive real yields and credible policy frameworks providing a good environment for return capture. Latin America also benefits from favourable trade dynamics given its relatively lower exposure to US tariffs on manufactured goods. Markets are pricing in fiscal risks and yield curves are steeper in countries where debt ratios are rising faster. We believe local currency bonds offer attractive opportunities even if US dollar does not materially weaken.

EM currencies faced a stronger US dollar in October; and overall FX returns were marginally negative. Higher yielders and currencies that benefit from improving terms of trade presented relative outperformers.

Copper and gold producing countries led returns with Peru and Chile at the top. Underperformers were currencies with larger manufacturing contributions to their economic output. Although periodic US dollar strength could cap near-term gains, attractive real interest rates, robust fundamentals and renewed investor engagement inform our overweight into the year end.

• Fixed Income Monthly - October 2025
• 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