Insights
Taking It Easy
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Global Fixed Income Bulletin
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December 12, 2025
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Taking It Easy
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December 12, 2025
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Taking It Easy
Taking It Easy |
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November appeared uneventful on the surface, but beneath the calm, global government bond markets were quietly recalibrating. Across the G7, yields moved sideways as investors absorbed familiar late-cycle signals, incremental data, and routine political noise. Yet one market consistently set itself apart: U.S. Treasuries, which managed to finish the month modestly lower in yield even as Bunds, Gilts, and JGBs drifted slightly higher. The true narrative, however, centered on the evolution of expectations around the Federal Reserve—where conviction, hesitation, and ultimately clarity unfolded in rapid succession.
Outside the U.S., markets behaved like they were catching their breath. Most developed-market curves nudged higher in yield, reflecting localized supply dynamics and steady central-bank communication rather than any major macro shock. In contrast, Treasuries quietly reclaimed the leadership position within G7 rates, supported by a month that began with confidence in a December Fed cut, detoured into doubt as data went dark, and ended with a decisive turn once the backlog of indicators finally arrived.
The path of Fed expectations shaped the entire month. Early November opened with a mildly dovish tone, and markets priced a December cut with confidence as softer labor trends and steady disinflation kept the late-cycle narrative intact. But the U.S. government shutdown abruptly halted the release of more than a dozen key indicators—from CPI and payrolls to retail sales and PCE—creating a rare data vacuum. In the absence of hard evidence confirming further cooling, investors grew increasingly cautious; cut probabilities dropped below 30%, and Treasury yields hovered near local highs.1
Everything shifted once the shutdown ended. As agencies released clusters of delayed data, the macro picture snapped back into focus. Across labor, consumption, activity, housing, and prices, the message was consistent: the economy was cooling in an orderly manner and inflation continued to soften. No single release turned the tide, but the cumulative weight of the information restored conviction. Within days, December cut odds surged back into the 80s, forward rate expectations eased, and the 10-year Treasury rallied toward 4.00%.
In retrospect, November was defined less by large market moves than by the transition it marked. After weeks of trading on partial information, investors finally received the confirmation needed to lean into a more accommodative policy path. By month-end, the market was prepared not just for a December cut, but for the broader easing cycle expected to carry into 2026.
Corporate Credit: Corporate credit delivered a varied month; Investment Grade (IG) spreads widened on elevated supply and softer sentiment, high yield retraced early volatility supported by net negative supply, and convertibles underperformed as thematic risk-off tone weighed on equity-linked structures even as issuance remained strong.
Securitized Products: Agency Mortgage-Backed Securities (MBS) spreads held steady at historically wide levels, while securitized credit modestly outperformed on stronger carry and steady fundamentals across Residential MBS, Asset-Backed Securities (ABS), and higher-quality Commercial MBS.2
Municipal Bonds (Taxable and Tax-Exempt): Taxable municipals posted solid results in line with broader high-quality fixed income, supported by constructive technicals and stable credit conditions, while tax-exempts lagged after an extended period of outperformance.
Fixed Income Outlook
With global central banks progressing further into the easing cycle, fixed income markets are entering a more nuanced phase. Policy signals have become less uniform, and while inflation continues to trend lower, growth momentum is moderating unevenly across regions. This backdrop reinforces the importance of maintaining flexibility and emphasizing high-quality income as markets adjust to shifting supply-demand dynamics and recalibrating term premia.
Across developed markets, we hold a neutral duration stance while expressing selective curve and cross-market views. In the U.S., we continue to favor steepening structures as long-end valuations remain sensitive to evolving fiscal and supply factors. Regional divergences present opportunity: we remain underweight Canada relative to the U.S. as its easing cycle matures, constructive on Gilts following improved fiscal signals, and see relative value in Australia versus New Zealand. Japan remains the key outlier, where rising term premia and evolving policy expectations support duration shorts and constructive breakeven positioning.
Credit markets enter year-end with solid fundamental footing but limited valuation cushion. In investment grade, carry remains compelling, supported by conservative balance sheets and muted downgrade risk, though heavy issuance and heightened M&A activity argue for selectivity. High yield spreads remain near post-crisis lows, and while earnings resilience provides support, softer labor trends and pressure on lower-income consumers call for disciplined issuer selection. Convertible bonds continue to offer attractive convexity, though elevated deltas underscore the need to emphasize balanced structures with firm bond floors.
Securitized products remain well-positioned, particularly agency MBS and residential mortgage credit, where valuations and fundamentals are constructive and technicals continue to improve. We expect agency spreads to tighten gradually as demand from banks and relative-value buyers strengthens, though full normalization may await the later stages of the Fed’s easing cycle. By contrast, we remain cautious in areas tied to consumer stress and in CMBS subsectors facing structural challenges, even as operating performance in higher-quality segments remains resilient.
Taxable municipals continue to offer appealing relative value, supported by stable credit fundamentals, manageable supply, and consistent institutional demand. With policy uncertainty still a key driver of rates, we maintain a slightly shorter-duration posture while taking advantage of compelling absolute yields.
Overall, we expect carry and income to remain the dominant contributors to returns as markets navigate the transition into 2026. With valuations tight in many spread sectors and policy visibility limited, disciplined security selection, diversification, and a renewed focus on quality remain essential.
Developed Market Rate/Foreign Currency
Monthly Review
Risk assets wavered in early November as concerns over stretched U.S. tech valuations coincided with a more hawkish tilt in Federal Reserve communication. The October FOMC minutes, released mid-month, struck a cautious note on the pace of potential easing, with officials emphasizing uncertainties surrounding the economic outlook. U.S. Treasury yields remained confined to a narrow range, but the curve’s steepening trend resumed as long maturities lagged front-end performance. In the latter half of the month, more dovish commentary from several Fed speakers prompted markets to price a December rate cut as the base case. Ultimately, 10-year Treasury yields ended the month just 6 basis points (bps) lower, and risk sentiment stabilized enough for the S&P 500 to finish modestly higher. The data calendar was light, with the delayed September employment report standing out; it showed firmer-than-expected payrolls growth (+119k) but a rise in the unemployment rate to 4.44%.3
Across the euro area, PMIs generally remained in expansionary territory, though momentum eased in several national prints. Inflation data came broadly in line with the European Central Bank (ECB’s) cautious stance. Toward month-end, European curves steepened again, driven in part by market focus on the Dutch pension transition and related demand dynamics at the ultra-long end. Sovereign spreads continued their slow grind tighter, while swaps underperformed cash bonds, particularly in longer maturities.4
Fiscal themes were prominent elsewhere. In Japan, term premia at the super-long end continued to widen as markets digested Prime Minister Takaichi’s stimulus messaging and the prospect of increased issuance, despite the supplementary budget being concentrated in maturities under five years. The selloff in Japanese government bonds intensified following additional hawkish signals from policymakers. In the UK, gilts rallied—led by the long end—after Chancellor Reeves announced sizeable tax increases and the DMO adjusted its remit toward greater short- and medium-dated supply. GBP recovered its earlier underperformance, and softer domestic data reinforced expectations of further BoE easing, with a December cut now nearly fully priced.5
In foreign exchange markets, the Bloomberg Dollar Index held within its recent range despite the U.S. equity volatility. EUR and GBP ended modestly higher, while JPY and AUD underperformed.6 High-carry EM currencies remained resilient even as risk sentiment softened.
Outlook
We remain broadly neutral on duration across developed markets excluding Japan, while maintaining targeted cross-market expressions. Within North America, we hold an underweight in Canadian government bonds relative to U.S. Treasuries, reflecting firmer Canadian macro fundamentals and our expectation that the Bank of Canada will adopt a less dovish stance as it approaches the end of its easing cycle. In the Antipodean complex, we continue to see relative value in Australian government bonds versus New Zealand.
Following the more constructive signals from the UK budget, we have also turned positive on Gilts. In the U.S., we retain our long-standing preference for curve steepeners, supported by the ongoing rebuilding of term premium and a maturing policy-easing narrative.
Japan remains an outlier in our DM positioning. We stay long inflation breakevens and have added to duration shorts, reflecting a confluence of bearish factors: evolving monetary policy expectations, ongoing adjustments in the yield curve framework, and expanding term premia.
In FX, we continue to favour a basket of predominantly high-beta currencies versus the U.S. dollar, given supportive carry dynamics and improving relative growth signals.
Emerging Market Debt
Monthly Review
Performance was strong for emerging market (EM) local markets and performance for hard currency assets was also positive, but more modest.7 The U.S. dollar moderately weakened due to weaker U.S. labor data and increasing expectations of a Fed rate cut in December. The Bank of Mexico cut rates as inflation slowed but also to stimulate growth as GDP contracted in Q3. The National Bank of Poland also cut rates as inflation dropped below target. U.S. foreign policy has recently increased its focus on Latin America with an increased presence in the Caribbean and attention on Venezuelan politics. Asset class flows continued to be positive for both hard and local currency funds, $0.8B and $1.3B, respectively. This brings YTD flows to $25.2B,8 which highlights investor interest to diversify their portfolios and seek fixed income solutions outside the U.S.
Outlook
The outlook for the asset class remains robust as numerous countries implement strong reform agendas. Valuations are appealing, especially for local assets. Many emerging market (EM) currencies are relatively undervalued and are supported against the U.S. dollar which has continued to weaken. Real yield differentials between emerging markets and developed markets (DM) remain favorable. The macroeconomic environment is supportive for the asset class and investors continue to allocate to the asset class. However, the emerging markets landscape is diverse, making it essential to focus on country-specific fundamentals and policy directions.
Corporate Credit
Monthly Review
Investment-grade credit performance in November was shaped primarily by softer risk sentiment and heavy primary supply. Global IG spreads widened 3 bps as technicals weakened, with both EUR and U.S. markets absorbing substantially higher-than-expected issuance. European IG corporate spreads ended 6 bps wider at +83 bps, underperforming U.S. IG, which widened 2 bps to +80 bps. Elevated non-financial issuance weighed on EUR industrials and utilities, while financials held up better. Subordinated financials and corporate hybrids moved broadly in line with the market, widening 5–6 bps. French and Italian risk marginally outperformed, the latter supported by a sovereign rating upgrade. In the U.S., sector dispersion persisted: utilities lagged, senior bank debt remained resilient, and life insurance, financial services, technology, airlines, and basic industry saw the most widening; consumer non-cyclicals continued to grind tighter. Corporate activity was robust, with M&A dominating headlines. Notable transactions included Deutsche Börse’s exclusive talks to acquire Allfunds, Orange’s consolidation moves in France and Spain, Veolia’s purchase of Clean Earth, and multiple large U.S. deals across consumer health, diagnostics, energy, and packaging. Supply was the key driver of market tone. EUR IG issuance reached EUR 101bn—well above expectations—while U.S. IG issuance hit $140bn, the largest November on record.9 Despite strong demand, concessions widened due to the scale of supply, though inflows into the asset class remained solid.
U.S. and global high yield performance ultimately strengthened in November, reversing early-month weakness. Spreads widened over the first two weeks as elevated volatility and concerns about stretched valuations weighed on risk assets; U.S. high yield spreads briefly approached 340 bps. Sentiment improved in the second half of the month as volatility eased and Treasury yields declined amid expectations for a December Fed rate cut, allowing spreads to retrace and finish tighter than where they began. Technical conditions remained broadly supportive. Gross issuance was healthy but readily absorbed, while retail demand stayed muted. More than $33 billion in calls, tenders, maturities, and coupons created net negative supply, and rising-star activity continued to outpace fallen angels—further underpinning market tone.10
Global convertible bonds posted weaker performance in November, lagging both global equities and global fixed income.11 The asset class was pressured by risk-off sentiment in key thematic areas—particularly cryptocurrencies and AI—both of which represent meaningful exposures within the convertible universe. Despite the softer tone, primary market activity remained exceptionally strong. Issuance reached $15.8 billion in November, with U.S. issuers accounting for roughly 90% of supply. Year-to-date issuance rose to $153.9 billion, putting the market on pace to exceed the $159 billion issued in 2020.12
Outlook
As year-end approaches, we remain cautiously constructive on investment grade credit. Corporate fundamentals are solid, with disciplined leverage and healthy liquidity, and we see limited downgrade or default risk in a moderate-growth backdrop. While November’s record EUR and U.S. supply briefly softened technicals, sustained inflows and strong demand suggest the overall technical environment remains supportive, though increasingly issuer- and sector-specific. We maintain a neutral duration stance and continue to favour curve steepeners amid shifting supply–demand dynamics. Carry remains the primary return driver, but tight spreads, heavy issuance pipelines, and elevated M&A activity argue for ongoing selectivity. We favour issuers with robust balance sheets, low cyclicality, and resilient free cash flow profiles, particularly in regions where policy settings are supportive and fiscal risks contained.
As we enter the final month of the year, we retain a cautious but constructive outlook on high yield. Macro conditions remain broadly supportive—U.S. growth is slowing but positive, inflation is tracking close to expectations, and corporate earnings have been resilient. At the same time, pockets of softness persist, including weaker labor indicators, pressure on lower-income consumers, mixed survey data, and elevated valuations in segments tied to AI-driven optimism. Against this backdrop, we expect a regime of slower but positive growth and still-sticky inflation. High yield spreads remain only about 30 bps above post-GFC lows, limiting valuation cushion, yet all-in yields remain historically attractive and should continue to draw capital. Fundamentals remain stable, refinancing risk is manageable, and technicals supportive—but much of the good news is already priced. As a result, selectivity is critical. We continue to emphasize issuers with durable cash flows, manageable leverage, and clear access to capital markets, as well as sectors less exposed to consumer-related weakness.
As we enter the final month of the year, we remain constructive on the fundamental backdrop for global convertible bonds, but with a measured degree of caution. Trade-policy-related volatility has largely subsided, U.S. earnings have held up well, and earlier signs of strain among lower-income consumers have begun to stabilize. Still, third-quarter data—including slowing job growth, mixed survey indicators, and firming consumer prices—reinforce a more tempered macro outlook. We expect a forward environment of slower but positive growth and persistently sticky inflation. Convertibles have generally preserved their asymmetric return profile through recent volatility; deltas declined from elevated levels in November but remain comfortably above 50%,13 reflecting the asset class’s increased equity sensitivity. While this equity-like behavior warrants caution, we continue to see attractive opportunities for selective investors—particularly in balanced structures with solid bond floors, where convexity and downside protection remain compelling.
Securitized Products
Monthly Review
Agency MBS spreads were unchanged in November at +124 bps versus Treasuries and remain wide relative to history and other core sectors. The Fed continued balance-sheet runoff, with MBS holdings declining by $16 billion, while banks’ holdings were little changed; money managers remained the primary buyers at current valuations.14 The Agency MBS Index returned 0.62%, modestly trailing Treasuries on a duration-adjusted basis, though year-to-date performance remains strongly ahead. Elevated mortgage rates kept refinancing deeply out-of-the-money, contributing to a modest extension in index duration. Securitized credit modestly outperformed as spreads tightened and carry remained competitive versus corporate credit. Issuance was steady across sectors: ABS supply reached $39.6 billion, non-agency CMBS $16.0 billion, and non-agency RMBS $16.1 billion.15 RMBS spreads tightened 0–5 bps, supported by positive mortgage fundamentals, strong homeowner equity, and low delinquency rates, though origination volumes remain muted. ABS spreads also improved slightly; while consumer delinquencies continue to drift higher—particularly among lower-income borrowers—they remain manageable for most structures. CMBS spreads tightened 0–5 bps. Weakness persists in Class B office, but logistics, storage, high-quality multifamily, and luxury hotels continue to exhibit solid operating performance. European securitized spreads were little changed, and allocations continued to shift toward relatively more attractive U.S. opportunities.
Outlook
We remain constructive on U.S. agency MBS valuations and expect spreads to grind tighter over time. Attractive relative value versus both other core fixed income sectors and cash alternatives should continue to draw inflows from money managers and, eventually, banks—particularly as regulatory constraints ease and short-term rates decline. That said, we do not expect the full tightening potential to be realized until the Federal Reserve approaches the end of its rate-cutting cycle in 2026.
In securitized credit, we expect spreads to hold broadly around current levels. The credit curve has flattened materially year-to-date, leaving limited room for further tightening unless agency MBS leads the market inward. While its shorter duration has weighed on relative performance, securitized credit’s higher carry has kept returns broadly in line with agency MBS. We anticipate carry to remain the primary return driver in the coming months. Fundamentally, elevated rate levels continue to stress certain borrowers. We expect further erosion in household balance sheets, creating pressure in select consumer ABS segments—particularly among lower-income borrowers. Commercial real estate also faces ongoing challenges despite modest rate relief. By contrast, residential mortgage credit remains our preferred opportunity set and the area where we are most comfortable extending down the credit spectrum.
Overall, we remain positive on agency MBS, which continue to offer compelling value relative to both investment-grade corporates and historical norms.
Taxable Municipals
Monthly Review
Taxable municipals delivered a 0.64% return in November, bringing year-to-date gains to 8.27% and broadly tracking the performance of other high-quality fixed income sectors. Tax-exempt municipals lagged with a 0.23% monthly return, giving back a portion of recent outperformance. The Treasury curve bull-steepened as markets priced in additional Fed easing amid softer labor-market data; intermediate maturities led taxable muni performance while the long end modestly underperformed following October’s strength. Technical conditions remained constructive. November supply totaled approximately $4.8 billion—below this year’s average but in line with seasonal norms—with index-eligible issuance led by Ascension Health and Cornell University.16 Demand remained firm as investors sought diversification against widening concerns in corporate credit. Index spreads widened about 3 bps, mirroring the modest widening seen in investment-grade corporates. Overall municipal credit fundamentals remain solid heading into 2026.
Outlook
We expect monetary policy uncertainty to remain a near-term driver of taxable municipal performance. While the Fed delivered a second 25 bps cut in November, Committee communication signaled growing disagreement about the pace of future easing. Incoming data—delayed by the government shutdown—will be critical in clarifying the trajectory of labor-market cooling and inflation as policymakers approach year-end.
Spreads are likely to stay range-bound with a mild widening bias should broader credit markets reprice, but the sector continues to offer compelling relative value supported by steady demand, manageable supply, and strong municipal credit fundamentals.