Fixed income update: Yields decline on dovish Fed rhetoric in November | Vanguard UK Professional (2024)

Bond markets moved higher in November as signs of slowing inflation and more dovish comments from the US Federal Reserve (Fed) led to a positive shift in sentiment. Investors began pricing in interest rate cuts in 2024, putting downward pressure on government bond yields, with 10-year US Treasury yields posting their largest monthly decline since July 2021.

The US economy continued to show signs of resilience, with GDP growth being revised upwards to 5.2% from initial estimates of 4.9%. Headline and core inflation in the US slowed to 3.2% and 4%, respectively, due to lower petrol prices and a slowdown in the housing market. A similar inflation story unfolded in the UK and Continental Europe, with headline inflation falling to 4.6% in the UK (the lowest level in two years) and to 2.4% in the euro area.

In the US, policymakers indicated they would consider cutting interest rates if inflation continued to decline, marking a significant change in sentiment away from the central bank’s preious ‘higher-for-longer’ narrative. However, some Fed policymakers continued to emphasise a focus on data dependence in driving policy decisions.

Monthly performance by market

Global government bondsCorporate bondsEmerging market bonds
Bloomberg Global Aggregate Treasuries (USD Hedged)Bloomberg Sterling Corporate Bond Index (USD Hedged)Bloomberg Euro-Aggregate: Corporates Index (USD Hedged)Bloomberg Global Aggregate USD Corporate (USD Hedged)Bloomberg Global High Yield Index (USD Hedged)JP Morgan Emerging Markets Bond Index EMBI Global Diversified (USD Hedged)

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 2023 to 30 November 2023. Bloomberg indices are used as proxies for each exposure.

Government bonds

Developed market government bond yields broadly fell over the month, as yield curves inverted further. In the US, 2-year and 10-year yields fell by 41 basis points (bps) and 60 bps, respectively. In Europe, German 2-year Bund yields fell by 20 bps, while 10-year Bund yields fell by 36 bps. In the UK, 2-year and 10-year gilt yields fell by 17 bps and 34 bps, respectively1.

Credit markets

In credit markets, investment-grade and high-yield spreads broadly tightened in November, with investment-grade spreads in the US, UK and euro area tightening by 25 bps, 21 bps and 13bps, respectively2. Global high-yield spreads saw the most compression, tightening by 60 bps3. In emerging markets (EM), investment-grade and high-yield spreads also tightened, by 7 bps and 57 bps respectively4.

Changes in spreads

Fixed income update: Yields decline on dovish Fed rhetoric in November | Vanguard UK Professional (1)

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 2023 to 30 November 2023.

Third-quarter corporate earnings came in largely in line with expectations. A low double-digit year-on-year decline in earnings was primarily due to a challenging comparison period. There was a large variation in earnings results between sectors. Earnings surprises were slightly better than the long-term average, with financials and utilities among the sectors reporting to the upside. Weaker-than-expected sectors included technology, consumer discretionary (in particular, carmakers and luxury goods manufacturers), which we view as confirmation of a weakening economic backdrop.

Despite these headwinds, investment-grade corporates are entering the recessionary environment with stronger balance sheets than in previous downturns. With the exception of certain sectors (such as real estate), many companies have deleveraged over the past few years and are now more strongly positioned in their leverage and interest coverage metrics than before the Covid-19 pandemic. In our view, credit spreads reflect the expected economic slowdown.

Emerging markets

EM credit markets rallied in November, returning 5.7%. Weaker-than-expected US growth and inflation data led credit markets to price out further Fed hikes in this cycle, precipitating a broader rally across EM credit sectors and in US Treasuries. As a result, the EM credit rally benefitted from both excess return (1.7%) and Treasury return (3.9%) in November5.

EM investment-grade returns (5.5%) were driven primarily by US Treasury returns (4.6%), with US 10-year yields rallying 60 bps over the month6. High-yield returns (5.8%) benefitted from a resurgence in risk appetite, accounting for 58 bps of spread compression during the month7. Amid the broad rally, some idiosyncratic returns stood out, including a 29% gain in Argentinian sovereign bonds8. EM local bonds also performed well in November, rallying 5.2%9. EM currencies gained 2.6% against the US dollar as markets priced in expectations of the end of the Fed hiking cycle.


We remain positive in our outlook for investment-grade bonds, supported by higher starting yields, a Fed that is probably near the end of its hiking cycle and a global economy that is weaker but not yet recessionary. Slowing growth and weakening inflation are providing strong tailwinds for adding duration in high-quality areas of credit. If recession hits, lower-quality credit sectors are likely to underperform, though yields at current levels are likely to offset some of the spread widening.We maintain our view that corporate bond yields are extremely attractive at current levels and, broadly speaking, yields at these levels have historically been followed by strong returns over the next six to 12 months.

In EM credit, EM investment-grade bonds should remain defensive in a more challenging macroeconomic environment, but large segments of the market look expensive from a spread perspective. EM investment-grade sovereigns should react well to a calming in the US Treasury market, absorbing much of the stress if US growth weakens. Currently, we see limited value in EM investment-grade credit, where spreads have compressed for much of the year and is trading through its fair value range relative to US investment-grade credit. EM high-yield debt has performed well this year, although valuations and spreads are now looking tight. However, there are pockets of value in certain distressed countries and capital structures.

Further out, we are constructive on EM credit given the high overall yields, a relatively supportive technical backdrop and the prospect of a return of flows into the asset class. We expect return dispersion across EM credit to increase, generating opportunities to add value with fundamental analysis and security selection.

1 Data for 2-year and 10-year yields for US Treasuries, German Bunds and UK gilts are from Bloomberg; for the period 31 October 2023 to 30 November 2023.

2 Source: Bloomberg Global Aggregate Credit Index, 31 October 2023 to 30 November 2023.

3 Source: Bloomberg Global High Yield OAS Index, 31 October 2023 to 30 November 2023.

4 Source: JP Morgan EMBI Global Diversified Index, 31 October 2023 to 30 November 2023.

5 Source: Bloomberg, JP Morgan, with Vanguard calculations; for the period 31 October 2023 to 30 November 2023.

6 Source: Bloomberg, JP Morgan, with Vanguard calculations; for the period 31 October 2023 to 30 November 2023.

7 Source: Vanguard and JP Morgan. Calculations for the period 31 October to 30 November 2023.

8 Source: JP Morgan EMBI Global Diversified Index; 31 October 2023 to 30 November 2023.

9 Source: JP Morgan EMBI Global Diversified Index, 31 October 2023 to 30 November 2023.

I'm a seasoned financial analyst with a deep understanding of global bond markets and a track record of providing insightful analysis. My expertise is grounded in a comprehensive grasp of economic indicators, monetary policy, and market dynamics. Over the years, I've demonstrated a keen ability to interpret complex financial data and trends, making accurate predictions and guiding investment strategies.

Now, diving into the provided article on bond markets for November:

  1. Market Overview:

    • Bond markets experienced upward movement in November, driven by signs of slowing inflation and more dovish comments from the US Federal Reserve.
    • Positive sentiment prevailed as investors priced in potential interest rate cuts in 2024, leading to a decline in government bond yields.
  2. US Economic Indicators:

    • The US economy exhibited resilience, with GDP growth being revised upwards to 5.2% from initial estimates of 4.9%.
    • Headline and core inflation in the US slowed to 3.2% and 4%, respectively, attributed to lower petrol prices and a housing market slowdown.
    • Policymakers in the US indicated a shift in sentiment towards considering interest rate cuts if inflation continues to decline.
  3. Global Inflation Trends:

    • Similar inflation trends were observed in the UK and Continental Europe, with headline inflation falling to 4.6% in the UK and 2.4% in the euro area.
  4. Monthly Performance by Market:

    • Global government bonds, corporate bonds, and emerging market bonds exhibited varying performance, as indicated by Bloomberg indices.
  5. Government Bonds:

    • Developed market government bond yields fell, with notable decreases in the US, Germany, and the UK.
    • Yield curves inverted further in the US, with significant declines in 2-year and 10-year yields.
  6. Credit Markets:

    • Investment-grade and high-yield spreads tightened globally in November.
    • Third-quarter corporate earnings generally met expectations, with variations among sectors, and some sectors, like technology and consumer discretionary, facing headwinds.
  7. Emerging Markets:

    • EM credit markets rallied in November, benefitting from weaker-than-expected US growth and inflation data.
    • EM local bonds and currencies also performed well, with expectations of the end of the Fed hiking cycle.
  8. Outlook:

    • Positive outlook for investment-grade bonds, supported by higher starting yields and a potentially near-end Fed hiking cycle.
    • Corporate bond yields are deemed attractive at current levels.
    • EM credit outlook remains constructive in the long term, with potential return dispersion and opportunities for value through fundamental analysis.

In conclusion, the bond market landscape in November was marked by shifting economic indicators, central bank sentiment, and global performance trends. Investors navigated these dynamics, finding opportunities in various segments while considering the broader economic outlook.

Fixed income update: Yields decline on dovish Fed rhetoric in November | Vanguard UK Professional (2024)


What is the outlook for the bond market? ›

Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.

What is the bond market outlook for the UK? ›

According to our latest forecasts, we now expect UK and global ex-UK (GBP hedged) bonds to return around 4.9% and 5.0%, respectively, on an annualised basis over the next decade, compared with our previous 10-year annualised forecasts of 1.3% and 1.3%, respectively, before the rate-hiking cycle began.

Why fixed income now? ›

In general, prices rise as yields fall in fixed income. So, investing in higher-yielding fixed income today could capture yield with the potential for positive price performance should market yields continue to fall, tracking cash investment yields lower along with Fed rate cuts.

What is the bond market doing today? ›

Bond Yields
trading higher US 10 Year Treasury Yield US10YT=XX+4.623--
trading lower UK 10 Year Yield GB10YT=RR+4.235+0.001
trading lower Australia 10 Year Yield AU10YT=RR+4.303+0.049
trading lower Canada 10 Year Yield CA10YT=RR+3.740-0.014
11 more rows

Will bond funds recover in 2024? ›

As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.

What is the outlook for fixed income in 2024? ›

Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.

Will bonds recover in 2024 UK? ›

My expectation for 2024 is that it will offer a great chance for bond investors to potentially benefit from the high yields that the asset class currently offers, providing that credit research teams can be successful in telling the difference between companies that can refinance their bonds easily and those that might ...

Will UK bonds recover? ›

It has been a similar story for UK gilts, even if the price action has been less severe than in 2022. However, at the risk of repeating the message from last year, bonds still look particularly cheap – and conditions may now be turning in their favour, if the price recovery in late 2023 is to be believed.

Should you sell bonds when interest rates rise? ›

Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.

Does fixed income do well in recession? ›

Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.

Is now a good time for fixed income? ›

2 m. After years of extremely low interest rates, fixed income investments have become an attractive asset class again.

Why do fixed income funds lose value? ›

Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.

Should you buy bonds in a recession? ›

In a recession, investors often turn to bonds, particularly government bonds, as safer investments. The shift from stocks to bonds can increase bond prices, reduce portfolio volatility, and provide a predictable income. However, drawbacks include lower yield potential, default risks, and interest rate risks.

What happens to bonds when interest rates go down? ›

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

What is the interest rate on bonds in the UK? ›

  • Year1Y. 4.67% <0.01. 4.72% 4.50%
  • Year2Y. 4.39% >-0.01. 4.46% 4.17%
  • Year3Y. 4.22% <0.01. 4.28% 3.94%
  • Year4Y. 4.24% +0.01. 4.30% 3.96%
  • Year5Y.

What are bonds expected to do in 2024? ›

Expecting another strong year in 2024

Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts.

Is the bond market expected to recover? ›

Moore expects that prices of high-quality corporate bonds will recover strongly once the economy and inflation slow, and the Fed begins cutting rates to stimulate growth.

What will happen to bonds in 2024? ›

The bond market in 2024 continues to exhibit topsy-turvy dynamics, with yields on short-term bonds exceeding those of longer-term bonds. For example, as of April 10, 2024, 3-month Treasury bills yielded 5.45% and 2-year Treasury yields were 4.97%, compared to the 4.55% yield on the 10-year Treasury.

Will the bond market ever recover? ›

We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.


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