Unconstrained fixed income views: November 2025
The absence of official US economic data has been clouding the view of the economy, with the limited published data generating mixed signals. Now the US government shutdown is over, we expect this economic fog to gradually lift.
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Given the lack of clarity, it’s no surprise that neither our scenario probabilities nor our views on global duration & major fixed income sub-asset classes have changed materially over the month.
A soft landing continues to warrant the highest probability (60%). However, we now have an equally weighted risk across a no landing and hard landing outcome, having previously been slightly skewed towards a hard landing. This change mainly reflects our expectation that US data - once released - will hold up in the near term.
Our Scenario Probabilities – Still expecting a soft landing
Lots of noise, but little signal from recent US data
Aside from the market’s shift in expectations after October’s Federal Reserve meeting – when Chair Powell signalled that a December rate cut was far from guaranteed – US bond yields have seen little movement in recent weeks.
This is not surprising given the lack of official US economic releases, but also the lack of directionality in what has been released.
Investors are keenly focused on the US labour market – and here current evidence regarding the short-term outlook continues to be both limited and mixed. Broadly speaking, we expect some stabilisation in job growth in coming months but timing this given the high level of near term uncertainty is challenging.
As we move into 2026 fiscal policy will support activity, but in the next month or two, there are some signs that the consumer will remain somewhat subdued. We’ve seen weakness in US auto sales for instance – where we think the end of Federal subsidies for electric vehicles is only part of the story for the softening demand.
The story in Europe remains largely unchanged
The macro backdrop in mainland Europe is little changed over the month. We struggle to get too excited about the near term outlook for the European Central Bank (ECB), but expect a more dovish inflation narrative could emerge in early 2026, with downside risks to inflation.
Much of the good news about the upcoming UK Budget is in the price
In contrast, several signs of a cooling UK economy, such as a weaker labour market, slower growth and lower-than-expected core inflation, combined with optimism about the upcoming Budget on 26 November, have helped gilts perform well.
In the short-term, we believe a lot of the good news surrounding the Budget is in the price. There does appear to be a true commitment to the fiscal rules and to building back a larger fiscal buffer, although there’s plenty of execution risk ahead for longer dated gilts.
That said, we believe the market can price in more cuts by the Bank of England (BoE) to shorter maturities as we move into 2026. Policy uncertainty ahead of the Budget will also act as a drag on demand, strengthening the case for easier monetary policy.
Where does this leave us?
We expect government bond yields to track in relatively tight ranges until a clearer narrative emerges on how well - or not - the US economy has navigated the US government shutdown. As such we remain fairly neutral on interest rate risk overall.
Nevertheless, with US fiscal challenges still lingering and a large question mark over the legality of US tariffs, and therefore tariff revenues – we retain a steepening bias (positioned for shorter maturities to outperform longer maturities) across portfolios.
Within the eurozone, we’re less negative on semi-core markets. While France’s fiscal fragilities remain and have scope to resurface in 2026, but for now look contained.
In corporate credit, our relative preference for front end exposure in both European and US investment grade (IG) credit still holds. US IG as a whole however, remains unattractive in our view based on valuations, as does high yield in both the US and Europe.
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