Fixed Income Monthly - December 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

With the US government reopening, we can expect to see official data releases resume. These should help us get a better reading on the state of the US economy which has been demonstrating persistently strong growth.

The Atlanta Fed estimates US growth to be running at around 4%, which paired with more modest productivity growth estimates will likely add inflationary pressure.

One of the key drivers of this growth has been the easing of financial conditions - the collective market forces which can help boost growth through increased investment and consumption.

The Federal Reserve Board’s FCI-G model estimates that US equity market strength has contributed to a large portion of this growth, and the model currently expects them to add 75bps to growth in the next 12 months.

Financial conditions impulse to growth (%)

This dynamic runs contrary to market expectations of Fed rate cuts, which currently price 4 cuts by 2027. Much of this expectation comes from political forces, where the White House is keen for rates to be cut more aggressively.

The frontrunner to replace Jerome Powell as Fed Chair is Kevin Hassett, a known Trump ally with dovish intentions. While he may be able to push the Fed to cut more aggressively, in the face of the evidence that growth is strong, this would likely hurt long-dated Treasuries and the US dollar.

For this reason, we have a large underweight exposure to US rate duration. We remain short USD versus a basket of EM currencies which screen comparatively cheaply on a Real Effective Exchange Rate basis. We expect to see some long-term mean reversion in USD trade-weighted exchange rates, and US policies that are pushing capital away from the US would likely accelerate this.

Expensive US dollar is ripe for a correction

The UK budget made the fiscal consolidations that were necessary to ease the gilt market but much of this was done through ‘backloading’ where measures to reduce deficit spending will largely come into effect by 2029-30.

Gilt markets reacted positively to the budget due to the forecast reduction in issuance, but backloading may not be the most sustainable approach to balancing the UK’s fiscal budget - particularly amid political uncertainty. For these reasons, we have used the gilt rally to take profits and reduce our duration exposure to neutral.

In credit we remain outright short via CDX High Yield and iTraxx Crossover instruments. Valuations remain historically rich, with even further spread tightening in US HY in November. Our thesis on credit is based on the relative value of forward credit returns compared to government bonds with a similar duration. US BBBs in particular have never experienced a positive excess return over government bonds in 2 years at current spread levels.

Global IG credit returned 0.3% in November with spreads widening by 3bps overall. November was a volatile month for risk assets, with a resurgence in concerns on AI overinvestment and circular transactions coming to the fore at the start of the month and post Nvidia earnings. Spreads widened across the board despite a rally in the last week of the month which resulted in some retracing.

IG spreads (bps) end November slightly wider

We are positioned underweight credit risk while maintaining carry in the funds. This means that we maintain an attractive yield while being less exposed to capital loss in the event of spreads widening. Our view remains that the potential for further spread tightening from here is limited while the scope for widening is much larger. In the event of further wobbles on the AI narrative, risk assets are likely to sell off further and result in wider credit spreads.

US IG credit returned 0.6% in November, with spreads widening 2bps. We maintain our underweight in credit as spreads remain tight compared to history. Part of this spread widening can be attributed to continued weakness in sectors such as life insurance and business development companies which have exposure to private credit. Bonds being issued in the primary market continue to see strong demand, which is leaving little new issue premium as the technical support from high all-in yields continues.

The spread between higher quality issuers rated A+ and lower BBB rates issuers also remains narrow. Despite ticking up with risk-off sentiment, there is still room for further repricing. The expanding issuance from large technology firms has also pushed out their curves, meaning some tech companies with strong fundamentals sit closer to lower quality issuers.

Spread (bps) between BBB and A+ rated issuers

Euro IG credit returned -0.2% in November with spreads widening 6bps. Our underweight credit beta stems from the view that there is little potential for spreads to tighten whereas negative shocks could cause significant widening. We are also conscious of European corporates facing increased competition on the global stage from Chinese companies moving up the value chain. This may extend the weakness we are already seeing in the chemicals and autos sectors.

Sterling IG credit returned 0.1% in November with spreads widening by 2bps. We are maintaining our defensive stance on credit with a preference for more stable sectors like student accommodation and water companies.  November’s main event was the UK Budget, where fiscal headroom surprised to the upside. This should provide some stability and increase the “investability” of UK credit, which represents a significant proportion of the sterling index. However, growth downgrades will likely be negative for risk assets.

Asia IG credit returned 0.3% in November with spreads widening by 6bps. Spreads are remaining at reasonably tight levels and the asset class has broadly shrugged off the wobbles in risk assets.

Global HY delivered 0.3% in November, with spreads remaining range bound. Fundamentals continue to remain resilient, supported by low default rates and accessible refinancing markets. However, stress remains concentrated in weaker cohorts, and valuations leave limited room for error. We have moved from neutral to positive on global HY, supported by attractive carry and stable balance sheets.

US HY posted 0.5% in November with spreads 2bps tighter as markets navigated shifting Fed expectations, strong earnings, the government shutdown and equity volatility. Higher-quality issuers outperformed, while CCCs recorded a second month of negative returns. Sector performance was mixed, with strength in metals and mining offset by weakness in chemicals and in parts of technology. Defaults remain low, but distress indicators edged higher, with most pressure in the weakest cohort.

US HY: Sector divergence persists

The policy backdrop is supportive, with the Fed cutting rates and quantitative tightening expected to slow, although uncertainty around the pace of easing next year is influencing sentiment. While volatility around AI-exposed names and private credit persists, these do not yet signal a shift in the broader trend. With stronger earnings, a lighter supply calendar, modest spread widening and favourable seasonality, the near-term outlook has improved. We have therefore moved from neutral to positive on US HY, while maintaining a selectivity and avoiding the weakest areas.

European HY was broadly flat in November, with spreads remaining at already low levels. Higher-rated issuers outperformed as investors favoured stronger balance sheets, while primary supply remained manageable and largely refinancing-driven, supporting orderly technical conditions. The market also benefits from a higher-quality composition dominated by BB-rated issuers, which have outperformed single-Bs and CCCs year-to-date.

With easing inflation, moderate growth and contained core yields, the asset class continues to be supported by solid fundamentals and generally favourable technicals. Notably, average coupons in EHY have climbed this year, providing a stronger income cushion despite tighter starting yields compared with previous periods. We maintain a positive stance on EHY but are cautious on the lower-quality tail, as rising dispersion and isolated weakness among lower-rated names reinforces the need for disciplined credit selection.

EHY: Coupons continue to rise while yields stabilise

Asian HY declined 1.5% in November, with spreads 68bps wider, mainly due to renewed volatility in some China property issuers. While this segment remains challenged, its significantly lower index weight limits its broader impact. Outside property, fundamentals are stable, supported by stronger balance sheets, although valuations across much of the market remain tight. We stay neutral on AHY, recognising resilient fundamentals but awaiting more attractive valuations across non-property sectors.

Emerging market debt delivered a month of positive performance in November across asset classes, extending the constructive trend seen through the second half of the year. Local currency markets outperformed (+1.3%) following duration gains and renewed EM FX strength, while hard-currency sovereign (+0.4%) and corporate (+0.2%) returns benefited primarily from lower US Treasury yields.

Currency valuations still screen cheap in real terms

Hard-currency sovereign spreads moved modestly wider in November, from tight levels (+8bps). Overall, credit valuations are compressed, yet fundamentals have been improving and remain solid overall. Many EM countries benefit from credible policy frameworks, moderating inflation and improved access to external funding markets.

Argentina’s mid-term election outcome has strengthened the administration of Javier Milei and its ambitious reform agenda, but from here, a more flexible FX regime and a credible reserve rebuilding strategy remain essential for continued compression of Argentine risk premiums.

In Senegal, discussions about a new funded program from the International Monetary Fund have not concluded successfully with markets subsequently trading sharply lower. We remain cautiously optimistic for returns from the hard currency credit segment, so remain overweight, with emphasis on selective carry opportunities and disciplined risk management.

Local currency markets are supported by well anchored inflation expectations and a general trend for lower consumer prices across key markets.  We remain constructive for local market returns, particularly when measured in US dollars.

Over the next few quarters, we are expecting global financial conditions to stay accommodative, supported in a large part by a weaker US dollar. In this environment, we view select EM currencies as fundamentally undervalued based on real effective exchange rate metrics.

EM fundamentals: Stronger growth and external balances offset weaker fiscal positions

Domestically, EM central banks moved early to contain inflation, helping prevent a sustained rise in inflation expectations. With price pressures continuing to ease, policy settings remain conducive for duration exposure. We maintain an overweight stance in local duration.

We maintain a long EM FX stance, as we seek to benefit from the weakening dollar and generally attractive EM FX valuations. High real interest rates, credible policy frameworks and a general tendency for goods prices to trend lower amid oversupply in China are important structural arguments for gaining exposure to emerging market currencies. Within the segment, we prefer metals exporters over hydrocarbon producers, pro-active central banks over reactive policy environments and higher carry versus lower carry currencies.

• Fixed Income Monthly - November 2025
• 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