• Bond yields broadly fell in November as markets digested the US election outcome and the potential policies proposed by President-elect Donald Trump.

• Developed market government bond yields fell, with US two- and 10-year yields lower by 2 bps and 12 bps, respectively.

• In credit markets, investment-grade spreads broadly tightened over the month. 

The US election was the main mover of fixed income markets in November, as investors digested its outcome and the implications it could have on markets globally. Following Donald Trump’s reelection as president of the United States on 5 November, 10-year US Treasury yields initially rose by around 16 basis points (bps), before eventually tracking downwards to finish lower for the month¹.

Elsewhere, in Europe, political upheaval in Germany and France spurred volatility in bond markets. German swap spreads plunged—temporarily dipping into negative territory—indicating increased concerns about anticipated levels of new government bond issuance. In France, disagreements over the 2025 budget led to a vote of no confidence in the country’s then prime minister, Michel Barnier, causing French bond spreads to widen roughly 7 bps versus German bunds².

Inflation in developed markets broadly rose. In the US, headline inflation rose marginally to 2.6%, while core inflation remained at 3.3%. In the UK, headline inflation rose more than expected, to 2.3%, while core inflation rose slightly to 3.3%. In the euro area, headline inflation rose to 2%, above market expectations, while core inflation remained steady at 2.7%. Euro area wage growth surged, driven by negotiated wage increases in Germany.

In November, the US Federal Reserve (Fed) cut interest rates by 25 bps, and Chairman Jerome Powell emphasised that near-term monetary policy would not be affected by the US elections. In the UK, the Bank of England also cut interest rates by 25 bps.

Monthly performance by market

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg, for the period 31 October 2024 to 30 November 2024. Bloomberg indices are used as proxies for each exposure³.

Government bonds

Government bond yields broadly fell in November. In the US, two- and 10-year yields fell by 2 bps and 12 bps, respectively. In Europe, German two-year bund yields fell by 33 bps and 10-year yields fell by 30 bps. In the UK, both two- and 10-year yields fell by 20 bps⁴. 

Credit markets

Investment-grade (IG) spreads broadly tightened over the month, with the exception of European spreads. US IG spreads tightened by 6 bps, while euro area IG spreads widened by 4 bps and sterling IG spreads remained flat⁵. In emerging markets (EM), IG and high-yield (HY) spreads tightened by 4 bps and 21 bps, respectively⁶. 

Changes in credit spreads

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg. For the period 31 October 2024 to 30 November 2024 Proxies used for each exposure⁷.

The third quarter earnings season largely concluded in November. Overall, there were no major negative surprises, outside of known weak spots. In particular, subdued demand in the consumer discretionary sector continued to impact earnings, especially in key markets like China and, to a lesser extent, Europe and the US. The automotive sector also continued to struggle⁸.

Our base case remains that, over the coming quarters, revenue and earnings growth will pick up as the rate cutting cycle aids consumer confidence and stimulates economic activity, albeit under the revised macroeconomic expectations that the recovery will likely be slower than previously expected. Geopolitical tensions continue to pose a downside risk to the 2025 earnings recovery scenario. Away from earnings, we remain of the view that overall, IG company fundamentals are in good shape thanks to the broad deleveraging undertaken by many firms over the past few years.

The technical backdrop across credit markets remains positive. Since the beginning of the year, we have observed steady inflows into IG credit. With most central banks now firmly on a cutting path and credit yields still at attractive levels, we expect demand for credit to remain strong. The steepening of yield curves should further support the flow of funds from money markets into bonds.

Emerging markets

EM credit returned 0.8% overall in November, but this is masking an underlying divergence in performance between the IG and HY segments of the market. While EM IG declined -0.2%, EM HY posted an impressive monthly return of +1.7%⁹. EM IG spreads widened by 14 bps, a meaningful move in risk-adjusted terms, which was mostly offset by positive US Treasury returns¹⁰. Meanwhile, EM HY spreads compressed by 23 bps, supported by continued fundamental improvements across issuers such as El Salvador (+8.2%), Argentina (+12.9%) and Sri Lanka (+7.7%)¹¹.

EM credit spreads 

Source: Bloomberg and Vanguard. For the 24 months to 30 November 2024. Proxies used: EM investment-grade: Bloomberg EM USD Aggregate Average OAS Index; EM high-yield: Bloomberg Emerging Markets High Yield Average OAS Index.

Outlook

We believe yields across fixed income are attractive. Historically, yields at these levels have typically been followed by strong returns over the subsequent six to 12 months.

In credit markets, spreads are consistent with a soft-landing narrative. In the US, we are continuing to see a healthy consumer, although the market is noting some dislocation between lower- and higher-income segments. Despite growth in Europe being lacklustre, we expect companies to remain resilient as fundamentals are starting from a strong base and many issuers have deleveraged over the last couple of years. Technicals remain strong, with robust demand for the asset class, while net supply in 2025 is expected to be flat or slightly lower. Global credit yields are currently higher than cash, and is likely to outperform cash considerably if further rate cuts are priced in.

In credit markets, we are starting to see European IG mean-revert after strong performance, although we still view it as more attractive than US IG. In HY corporates, technicals are still strong, though less favourable than in recent times. We saw a pick-up in rising stars compared with fallen angels earlier in the year¹², but this is starting to normalise. We have observed some spread compression within the sector, with CCC-rated bonds outperforming B and BB-rated bonds¹³, although overall, valuations still look stretched. A recessionary scenario would see lower-quality sectors become more vulnerable; however, yields at current levels are likely to offset some of the spread widening that would ensue if conditions deteriorated.

We are constructive on EM fixed income, as fundamentals are strong and yields are attractive. We believe a US rate-cutting cycle should be supportive for the asset class, so long as global growth remains resilient. Nevertheless, valuations are tight and economic uncertainty remains a risk going forward.

¹ Source: Bloomberg and Vanguard, for the period 31 October 2024 to 30 November 2024.

² Source: Bloomberg and Vanguard, for the period 31 October 2024 to 30 November 2024.

³ Source: Bloomberg and Vanguard, based on the Bloomberg Global Aggregate Credit Index, for the period 31 October 2024 to 30 November 2024. 

⁴ Source: Bloomberg and Vanguard, for the period 31 October 2024 to 30 November 2024. 

⁵ Source: Bloomberg and Vanguard, based on the Bloomberg Global Aggregate Credit Index, for the period 31 October 2024 to 30 November 2024. 

⁶ Source: Bloomberg and Vanguard, based on the Bloomberg EM USD Aggregate Average OAS Index and Bloomberg Emerging Markets High Yield Average OAS Index, for the period 31 October 2024 to 30 November 2024. 

⁷ Source: Bloomberg indices: Global Aggregate Credit Average OAS Index, Global Aggregate Supranational Index, US Aggregate Corporate Average OAS Index, Euro Aggregate Corporate Average OAS Index, Sterling Aggregate Corporate Average OAS Index, US Aggregate ABS Average OAS Index, US Aggregate CMBS Average OAS Index, Global High Yield Average OAS Index, JP Morgan EMBI Global Diversified IG Sovereign Spread Index, JP Morgan EMBI Global Diversified HY Sovereign Spread Index. Data for the period 31 October 2024 to 30 November 2024.

⁸ Source: Bloomberg and Vanguard, based on corporate earning results for the reporting period 1 July 2024 to 30 September 2024.

⁹ Source: Vanguard and JP Morgan, based on the JP Morgan Emerging Market Bond Index (EMBI) Global Diversified, for the period 31 October 2024 to 30 November 2024.

¹⁰ Source: Vanguard and JP Morgan, based on the JP Morgan Emerging Market Bond Index (EMBI) Global Diversified relative to US Treasuries, for the period 31 October 2024 to 30 November 2024.

¹¹ Source: Bloomberg and Vanguard, based on the Bloomberg Emerging Markets USD Aggregate Average Option Adjusted Spread (OAS) Index and Bloomberg Emerging Markets High Yield Average OAS Index, for the period 31 October 2024 to 30 November 2024. 

¹² ‘Rising stars’ refer to high yield issuers whose credit ratings have been upgraded from sub-investment grade (Ba1/BB+ or lower) to investment-grade (Baa3/BBB- or above) by ratings agencies S&P, Moody’s and Fitch. ‘Fallen angels’ refer to investment-grade issuers whose ratings have been downgraded to below investment-grade. An increase in rising-star versus falling-angel activity can signal a strengthening economic environment and/or improved corporate fundamentals. 

¹³ Source: Bloomberg and Vanguard, for the period 1 January 2024 to 30 November 2024.