Chapters
Market background
The longest US government shutdown in history ended in November, and its impact on the bond market was significant. The prolonged disruption – lasting 43 days – constrained the flow of economic data, resulting in a sharp swing in market expectations around a December Federal Reserve (Fed) rate cut. In the first half of the month, hawkish Fed minutes and better US economic activity data meant the market was pricing in a low (25%) probability of a rate cut, but this rebounded to around 80% by month-end following dovish comments from some Fed members. US Treasury yields fell further upon reports that Kevin Hassett – previously a supporter of additional rate cuts – had emerged as a leading contender for the next Fed chair. A bull steepening of the Treasury yield curve ensued, as dovish expectations meant shorter-dated yields declined more meaningfully than longer maturities.
It was a particularly strong month for the local currency debt market (JPMorgan GBI-EM GD), which gained 1.3% in US dollar terms. Performance was driven by emerging market (EM) currencies benefitting from a weaker US dollar, particularly in Latin America, with the Colombian peso and Dominican peso among the top performers. Local bonds also added to returns, with South African rates rallying after the government’s budget was well received by the market.
The sovereign hard currency debt market (JPMorgan EMBI GD) posted gains of 0.4%, driven by the high-yield segment (0.8%), while investment-grade returns were flat. Both investment-grade and high-yield markets benefitted from falling US Treasury yields, although in investment-grade the effect was muted by spread widening caused by increased US corporate issuance. From a regional perspective, African markets outperformed, while in Latin America, Ecuador’s bonds rallied following a credit rating upgrade by Fitch to B-.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
