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A choppy month for bond investors

October 2018

A turbulent October sent investors scrambling for the perceived safety of “haven” assets such as the Japanese yen, US Treasury bonds, and gold. Concerns about the gradual normalisation of monetary policy in key economies – particularly in the US – are fuelling uncertainties over the outlook for some emerging economies.

  • S&P maintained Italy’s credit rating at “BBB”
  • Moody’s downgraded Italy by one notch
  • The Fed is expected to raise rates again before year-end

To view the series of market updates through October, click here


A turbulent October sent investors scrambling for the perceived safety of “haven” assets such as the Japanese yen, US Treasury bonds, and gold. The benchmark US Treasury Bond yield had a choppy October, climbing above 3.2% early in the month. Over October as a whole, the benchmark bond rose from 3.06% to 3.1%. 

“The EC rejected Italy’s draft Budget proposals”

In its semi-annual Financial Stability Report, the International Monetary Fund (IMF) warned that “a dangerous undercurrent” of waning support for multilateralism poses a threat to the global economy. Although banks are more stable now than in the run-up to the financial crisis, the IMF identified fresh threats to stability, including trade tensions, growing inequality, and the possibility of a no-deal Brexit. Concerns about the gradual normalisation of monetary policy in key economies – particularly in the US – are also fuelling uncertainties over the outlook for some emerging economies. Investors expect the Federal Reserve (Fed) to continue to tighten monetary policy, and Fed officials are widely expected to implement another increase in December. 

The European Commission (EC) rejected Italy’s draft Budget proposals during October. Nevertheless, despite the country’s increasingly precarious financial situation, credit ratings agency Standard & Poor’s (S&P) elected to leave Italy’s credit rating unchanged at “BBB”, although its outlook was downgraded from “stable” to “negative”. S&P cited the government’s economic and budgetary plans, which represent “a reversal of Italy’s previously sustained fiscal consolidation path”. Meanwhile, Moody’s downgraded Italy’s credit rating from “Baa2” to “Baa3”, a move that kept Italy’s rating above “junk” status, but allotted the country a “stable” outlook. Moody’s believes that Italy’s shift in fiscal strategy leaves the country vulnerable to future domestic or external shocks. The benchmark Italian government bond yield surged from 2.79% to 3.39% over October as a whole. 

Fixed income funds experienced positive net retail inflows during September, according to the Investment Association (IA). UK Gilts and UK Index-Linked Gilts were the most popular fixed income IA sectors over the month. Demand for funds in the UK Gilts sector rose by almost 50% compared with August; elsewhere, having experienced net retail outflows of £60 million in August, the UK Index-Linked Gilts sector enjoyed inflows of £97 million in September. In contrast, investors’ appetite for funds in the Global Bonds sector dropped sharply, although interest in Global Emerging Markets Bond funds continued to exhibit modest strength. 


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