October 2025 review and outlook
Market environment
US corporate spreads widened by 4bp to 78bp option-adjusted spread (OAS), delivering total returns of 0.38% and excess returns of -0.28%. The index yield rose 1bp to 4.82%. Airlines and autos led sector performance, while cable satellite, media entertainment, and wirelines lagged. “A”-rated bonds widened 4bp and “BBB”-rated bonds widened 6bp. Credit curves steepened: intermediate maturities widened 4bp and longer-dated spreads widened 6bp.
European investment-grade spreads tightened 2bp to 77bp, generating total returns of 0.70% and excess returns of 0.19%. Autos, pharmaceuticals, and electric were top performers; chemicals, life insurance, and REITs underperformed.
High-yield spreads widened 14bp to 281bp, with total returns of 0.16% and excess returns of -0.24%. Higher-quality “BB”-rated bonds outperformed, returning 0.43%, versus lower-quality “CCCs” at -0.29%. The high-yield index yield rose by 8bp to 6.78%. Fallen angels totaled $600m; defaults reached $5.6bn, while rising stars amounted to $2.5bn.
In the US, the Federal Reserve cut interest rates by 25bp, taking the Fed funds rate to 3.75%–4%, as widely expected. The government shutdown delayed some economic reports, notably non-farm payrolls and earnings data. Inflation data showed the headline rate edged up to 3.0% (from 2.9%), while the core rate eased slightly to 3.0%. Consumer inflation expectations for the year ahead rose to 3.4%, below the 2025 peak of 3.6%. The ISM Manufacturing PMI improved modestly to 49.1, still signaling contraction but marking the strongest reading in seven months. The Philadelphia Fed Manufacturing Index fell sharply to -12.8 from 23.2, missing expectations of 10. Meanwhile, the University of Michigan consumer sentiment index declined for the third month to 53.6, slightly below forecasts.
Outlook
Our view is that the US faces both positive and negative influences on its economic growth from the prevailing position of lackluster and sub-par expansion. Stronger AI infrastructure-related business investment is likely to accelerate in the next few months, providing a positive stimulus to growth. Meanwhile, the labor market appears to be continuing to slow, and the full effects of tariffs imposed across the economy are likely to begin feeding through to dampen activity further. Overall, we believe the net impetus will be marginally positive heading into 2026, once the recent Fed rate cuts can begin to have an effect, but a slowdown should not be entirely ruled out. There is still some upside risk to inflation, but we do not believe that it will materialize or stand in the way of further rate cuts ahead, taking the Fed funds rate to 3.25%. Our expectations for bond yields in the next 12 months are that there is scope for shorter-dated yields to decline slightly from current levels as the Fed continues to ease policy. In a modest change to our view, we now expect 10-year Treasury yields to gravitate to around 4% and 30-year Treasuries to be 4.70% in a year’s time.
Technicals
October investment grade issuance totaled $123.4bn, well above expectations, driven by Meta’s $30bn deal[1]. Long-end issuance rose to 28% of total (versus 13% YTD average). November is expected to remain active, led by AI and M&A financing. Conversely, October high yield issuance was the second-lowest monthly volume at $17.8bn. Investment-grade inflows reached $42.9bn. Treasury yields declined across the curve: 5-yr -5bp to 3.69%; 10-yr -7bp to 4.08%; 30-yr -8bp to 4.65%.
Fundamentals
Third-quarter earnings growth (78% reported) has been strong at 14%, with 81.8% of companies beating expectations. Investment-grade leverage remains stable; interest coverage improved with lower rates, and EBITDA margins are at record highs. Liquidity is ample, supported by robust free cash flow and ongoing issuance. Rising M&A activity may modestly pressure credit metrics into 2026, though equity-heavy deal structures imply limited new debt issuance.
Valuations
Investment-grade spreads have moved above 80bp, partly due to heavy new issuance. Spreads had held in the 72-80 range since July. With yields near 5%, investment-grade offers an attractive long-term entry point, supporting positive flows. Valuations remain tight, but muted selling on negative news has prompted a modest tactical upgrade. Historically, US credit has performed well during rate-cutting cycles, though current spreads remain compressed.
Risks
- Weaker employment data impacting the consumer
- Geopolitical tensions
- Tariff-related impacts on growth and inflation
- Rising debt-funded M&A and shareholder distribution