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Oh là là
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Fixed income outlook brighter ahead after a dismal September
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Higher yields no longer produce predictable equity winners and losers.
OAT-meal for breakfast.
They say oats are healthy, but we are less sure about the French government bond variety, the Obligations Assimilables du Tresor (OAT). Indeed, the French government bonds remain under substantial market stress, and the near-term outlook is not particularly encouraging in our view. On this basis, our investment team continues to advocate caution towards the French sovereign, with little hope for now that spreads against Bunds will normalize to their pre-tremor level. To be fair, France is not having its own Liz Truss moment – at least not yet, but this is a risk ahead, especially if the fundamentals keep worsening or a major policy misstep occurs. The market developments over the past few days seem to have mainly reflected a shock to investor confidence and a buyers’ strike, which means that technicals have played a major role as a market driver. But when investor confidence is eroded, it is all the more critical to maintain impeccable policy credibility. In other words, we are skating on thin ice in Paris. Looking ahead, it will also be interesting to watch what the rating agencies may do, given the disconnect between the current market prices and France’s sovereign rating. Moody’s placed France under a negative outlook at its last rating review in the Spring, so it could be a case of the writing being on the wall. With respect to the broader impact onto the eurozone, the key variable to watch is the Euro, as a further collapse in the European currency would likely represent a policy challenge to the ECB. Overall, our investment team is of the view that there are more attractive sovereign credits than France in the eurozone on a risk-adjusted basis. Corporate credit seems to appear more attractive than Sovereigns given the support provided by the strong fundamental backdrop on the credit side, something that eludes many sovereigns these days.
Black September, but brighter outlook ahead?
September was a month to forget for global fixed income, given the challenging performance for the asset class. It was particularly tough for the long duration indices or the indices that were most sensitive to the sharp spike back to triple-digit territory for the MOVE index, an indicator of rate volatility.[1] For instance, tax-exempt munis produced a negative return of -4.36% for the month, their worst monthly performance since September 2008.[2] Likewise, the agency MBS index returned a negative 3.38% in September, its worst monthly return since September 2022.[3] Given the substantial rise in US rates, US indices underperformed, including the UST index which was down 2.24% for the month.[4] Meanwhile, the EUR indices outperformed, with EUR IG down only 1.33% for the month.[5] The top performer and the only asset class with a positive return for the month was leveraged loans, which makes sense given how challenging the backdrop for duration has been. Despite the recent performance setbacks, we believe that the outlook seems brighter ahead for fixed income. This mainly reflects an improvement in the duration landscape. We indeed are of the view that the market process of Fed policy repricing is now well advanced, and in fact, has perhaps moved into overpricing mode at this juncture. This may help cap the upside risks to rates from the standpoint of monetary policy. Separately, the upward momentum in US long-end rates seems to have slowed somewhat, although the fiscal challenges remain intact. Valuation-wise, it is worth noting that the backdrop has improved considerably, especially from a total yield perspective. This means that risk-adjusted return expected now look substantially better. For instance, the yield on US IG currently stands at 6.05%, a historically attractive level.[6] Since 2000 – but excluding the global financial crisis, the average one-year subsequent return for US IG when the yield was trading at about the current range (i.e. 5.75% to 6.35%) stood at a robust 7.29%.[7] Past performance is no guarantee of future returns but entry points matter in fixed income.
Higher yields no longer produce predictable equity winners and losers.
What matters is why yields are rising – and how leverage, earnings duration and company fundamentals interact. The latest increase in the 10-year Treasury yield has been driven more by real yields than inflation expectations, pressuring valuations in sectors priced on income or distant cash flows. Over the past two years, real estate, materials, consumer staples and utilities have been the most negatively exposed. Energy, communication services and consumer discretionary have been the least sensitive, with financials and technology in between. Leverage amplifies refinancing risk, while long-duration earnings and high dividends lose appeal as discount rates rise. Small caps may be particularly vulnerable. Technology might ordinarily be expected to be exposed, given its reliance on future earnings, but has proved more resilient than expected. Low leverage, strong cash generation and AI-related investment have supported earnings and offset higher discount rates. The underlying driver remains critical. If stronger growth is pushing yields higher, cyclicals, banks and selected technology companies can benefit as earnings growth offsets valuation pressure. If inflation, fiscal concerns or tighter monetary policy are responsible, the headwind is broader. The old playbook may become less reliable, in our view. Many traditional relationships were formed in an era of low inflation, cheap capital and predictable policy. Today, balance-sheet strength, structural investment and company fundamentals can outweigh conventional duration effects. As those relationships break down, knowing what you own matters more than relying on old rules (Contribution from Ross Cartwright, Lead Strategist – Strategy and Insights Group).
[1] Sources: Bloomberg, ICE BofA. The MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps. The Index tracks implied normal yield volatility of a yield curve weighted basket of at-the-money one month options. Data as of 2 Oct. 2026.
2 Sources: Bloomberg. Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Data as of 2 Oct. 2026. Returns are in gross and in USD.
3 Sources: Bloomberg. Bloomberg US Mortgage Backed Securities (MBS) Index. Data as of 2 Oct. 2026. Returns are in gross and in USD.
4 Sources: Bloomberg. Bloomberg US Treasury Index. Data as of 2 Oct. 2026. Returns are in gross and in USD.
5 Sources: Bloomberg. Bloomberg Euro Corporate Index. Data as of 2 Oct. 2026. Returns are in gross and in EUR.
6 Sources: Bloomberg. Bloomberg US IG Corp index. Yield to worst. Data as of 2 Oct. 2026.
7 Source: Bloomberg. Bloomberg US IG Corp index. Monthly data from January 2000 through September 2026. Returns are gross and in USD.
