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What happened last week?
This week, the Federal Reserve is anticipated to announce a 25 basis point rate cut, marking a key moment following the U.S. elections. Given the resilience in U.S. economic data, the Fed's communication will be closely scrutinized, especially any comments on the latest job report. The October jobs data showed significantly lower-than-expected growth, but factors like Hurricane disruptions and a Boeing strike had a noticeable impact. The private sector’s job creation has slowed, averaging only 67,000 jobs per month over the past three months, the lowest since the early pandemic period. Should the Fed place increased emphasis on the job market's health, it may commit to another rate cut in December, a scenario the market currently assigns an 85% probability. Overall, the Fed is expected to maintain a "data-dependent" stance, aligning with recent comments from Atlanta Fed President Raphael Bostic, who advised a patient approach amid current economic fluctuations. In Europe, ECB Governing Council member Fabio Panetta underscored the need for further rate cuts to counter economic sluggishness and ensure inflation doesn’t fall below target. Panetta pointed out that monetary conditions remain restrictive and that additional easing would be essential to support economic recovery. With inflation now under control and expected to momentarily increase after its recent drop to 1.7%, the ECB remains optimistic about hitting its 2% target much earlier than previously estimated (end of 2025). The market anticipates another rate cut in December and expects the deposit rate to be reduced to 2% by mid-2025, reflecting ongoing commitment to monetary easing. In the UK, the Bank of England is set to announce its latest decision on Thursday, with the market widely anticipating a rate cut. However, recent fiscal policy moves—specifically, the release of Chancellor Rachel Reeves’s budget, one of the most substantial fiscal loosenings in recent decades—have added pressure to the UK rate market. The likelihood of a December rate cut has dropped, with only a 25% probability now priced in, down from 65% just two weeks ago. In Japan, the Bank of Japan held its policy rate steady at 0.25% during its October meeting, as widely expected. Governor Kazuo Ueda signaled a slightly less dovish stance, notably omitting the phrase “ample time” when discussing the timeline for a potential rate hike. While Ueda reiterated that the BoJ would consider raising rates if economic and price outlooks align, he acknowledged that economic risks in the U.S. have largely eased. This shift has led some market participants to speculate that a BoJ rate hike could come as early as December or January next year. Finally, in Switzerland, the Swiss National Bank appears likely to continue lowering its policy rate (currently 1%) after Swiss inflation came in at 0.6% for October, lower than expected. The market currently assigns a 56% probability of a “jumbo cut” in December as the SNB aims to keep inflation within target.
In October, U.S. Investment Grade (IG) and High Yield (HY) corporate bonds saw spreads compress, although this narrowing wasn’t sufficient to offset the impact of rising U.S. rates. U.S. IG spreads tightened by 5 basis points to 84 bps, while HY spreads decreased by 20 bps to 275 bps, their lowest since 2021. The Vanguard USD Corporate Bond ETF dropped -2.4% in October, though it remains up +3% year-to-date, and the iShares Broad USD High Yield Corporate Bond ETF slipped -0.9%, still boasting a strong +7.7% gain YTD. Issuance volumes slowed across both IG and HY markets in October, with U.S. IG issuance down to around $100 billion compared to $168 billion in September, and U.S. HY issuance falling to approximately $25 billion from $40 billion the prior month. In Europe, IG spreads tightened by 15 bps to 103 bps, their narrowest since 2022. Despite this improvement, spreads remain far from pre-2008 levels (50 bps), as European credit markets contend with economic strains and an ongoing energy crisis tied to the Russia-Ukraine conflict. Nevertheless, spreads across ratings have reached their tightest levels since 2015. The iShares Core Euro IG Corporate Bond ETF was down -0.5% for October due to higher rates but holds a +3.0% YTD gain. European HY bonds outperformed, with spreads narrowing by 35 bps to 321 bps, the lowest level since early 2022. The iShares Euro HY Corporate Bond ETF gained +0.4% in October, buoyed by strong gains in European CCC-rated bonds, which surged +2.5% and now stand +11.7% YTD. Among high-beta European segments, performance varied: bank subordinated debt dropped by -1% in October, while corporate hybrids remained flat. Year-to-date, the Invesco Euro Corporate Hybrid ETF is up an impressive +8.6%, compared to the WisdomTree AT1 CoCo Bond ETF’s +7.4%, reflecting continued investor interest in diversified, higher-yield credit opportunities despite a challenging rate environment.
The U.S. bond market faced heightened volatility in October, with the 10-year Treasury yield surging to 4.38%, its highest level in four months. The MOVE Index, often called the "VIX of bonds," closed at a one-year high and the second-highest in 17 months, signaling intense market anxiety. This volatility reflects mounting uncertainty ahead of the U.S. elections, with the market anticipating yield swings of up to 20 basis points on election days. Against this backdrop, October proved challenging for U.S. Treasuries: the iShares USD Treasuries ETF fell -2.4% over the month, trimming its year-to-date gains to +1.4%. Treasury Inflation-Protected Securities (TIPS) also declined by -1.8% in October but remain a bright spot, up +3% year-to-date. The U.S. yield curve (2s10s) held relatively steady, closing the month at 11 basis points. Meanwhile, the 10-year Treasury yield rose by 50 basis points to end the month at 4.28%, with breakevens increasing from 2.19% to 2.35% and the real yield climbing from 1.6% to 1.95%. A marked improvement in the Citi Economic Surprise Index, moving from -0.8 to 38, along with election-driven uncertainty, has intensified upward pressure on yields. While U.S. yields spiked, European rates saw more contained movements. The 10-year German yield closed October at 2.38%, up from 2.12% in September. Italian and French spreads against German bonds narrowed by 6 basis points each, reaching 126 bps for Italy and 73 bps for France, despite recent scrutiny from rating agencies. The iShares Core EUR Govt Bond ETF ended October down over 1% but is still up slightly, +0.7% year-to-date. In the U.K., October’s bond market was roiled by Chancellor Rachel Reeves's substantial fiscal stimulus—the largest in decades. The 10-year Gilt yield surged to 4.44%, a year-high, with the Vanguard U.K. Gilt ETF losing -2.8% in October and down -3.6% year-to-date. Reeves’ budget managed to avert immediate market disruption but leaves lingering questions about the long-term impact of sustained high borrowing and inflation risks.
Emerging market
Emerging market (EM) bonds outpaced U.S. Treasuries in October, benefiting from another month of spread tightening. However, rising U.S. rates posed a challenge. EM corporate bond spreads reached 202 basis points, their lowest level since 2007, while sovereign spreads narrowed by 24 basis points to close at 272 basis points. Despite these spread gains, higher U.S. rates weighed on returns. The iShares Emerging Market Sovereign Bonds ETF declined by -2.4% in October, with the iShares Emerging Market Corporate Bonds ETF down -1.5%, though both are still up about +6.5% year-to-date. Local currency debt faced additional headwinds from the stronger U.S. dollar. The VanEck J.P. Morgan EM Local Currency Bond ETF fell -4.5% in October, wiping out its year-to-date gains to end slightly negative at -0.3%. Few EM currencies posted gains against the dollar by month-end; the South African Rand, Malaysian Ringgit, and Thai Baht were among the exceptions. Latin American currencies continued to struggle, with the Brazilian real and Mexican peso down -17% and -16% year-to-date, respectively. New EM bond issuance remained strong, totaling $64 billion in October despite the U.S. rate rise. Meanwhile, China’s economic data showed signs of resilience: October factory activity expanded for the first time since April, with the official manufacturing PMI reaching 50.1 and the Caixin/S&P Global survey hitting 50.3, signaling renewed order growth. Additionally, China’s top 100 property developers reported a 70% month-over-month increase in October sales, marking their first annual sales growth this year. In Brazil, the central bank is preparing to counter surging inflation, now expected to exceed 5%. Markets anticipate a 50 basis-point hike to 11.25% to contain inflationary pressures. Turkey saw positive developments as S&P upgraded its sovereign rating from B+ to BB-, reflecting improving fundamentals. These moves underscore both the resilience and the challenges facing EM bonds amid a complex global backdrop.
