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After seven consecutive months of rising long-term yields, the trend reversed in October. Storebrand AM has moved duration in global government bonds from underweight back to neutral, while maintaining underweight duration in Norwegian and Swedish government bonds.
The change follows concerns about the returns on, and financing of, large-scale AI investments, which contributed to a sharp fall in technology stocks and increased demand for US Treasuries. Global government bonds gained almost 2% in October.
The assessment is set out in the November edition of the monthly allocation report from Storebrand AM’s Tactical Allocation Team, led by Olav Chen, Head of Allocation and Global Fixed Income.
Long-term US Treasury yields declined in October for the first time in seven months. Concerns about the profitability and financing of large-scale AI investments contributed to a sharp fall in technology stocks, while investors returned to US Treasuries as a safer asset.
The higher starting level of yields has also made fixed income investments more attractive. If concerns around AI persist, expectations for technology companies’ funding requirements in the bond market could moderate, easing one of the pressures that has contributed to the rise in long-term yields.
“After seven months of rising long-term yields, we saw a clear reversal in October. Bonds are once again offering more attractive running yields, while concerns around AI investment are increasing demand for safer assets. Against that backdrop, we believe it is appropriate to move global duration back to neutral,” says Olav Chen, Head of Allocation and Global Fixed Income at Storebrand AM.
While long-term government bond yields declined in the United States, Japan, the United Kingdom and Germany, French yields continued to rise.
The spread between French and German ten-year government bonds widened from around 130–140 basis points to more than 170 basis points, its highest level since the euro-area sovereign debt crisis in 2011.
Concerns are centred on France’s public finances and high government debt. The uncertainty has also helped keep credit spreads wide, particularly among French banks. At the same time, large technology companies and hyperscalers continue to seek substantial amounts of bond market financing for AI investments.
“The decline in yields is neither broad nor uniform. France stands out, with higher sovereign risk premia and renewed scrutiny of public debt. This underlines the need to remain selective across fixed income markets,” says Chen.
The third quarter earnings season has been more mixed following two exceptionally strong quarters. Aggregate growth rates remain high but appear to be slowing, while several members of the so-called “Magnificent Seven” have delivered results somewhat below expectations.
The US economy nevertheless remains robust. GDP expanded by 3.4% in the third quarter, while private consumption increased by 3.8% despite continued cost pressures.
Markets are still pricing in more than two US rate increases over the next twelve months.
Global equities, measured by MSCI World in local currency terms, declined by 1% in October, marking a second consecutive monthly fall. The index remains up 12% year-to-date.
The decline was concentrated in AI and technology stocks following the more mixed earnings season. At the same time, the fall and subsequent stabilisation in yields have reduced some concerns that interest rate levels could constrain economic growth. The global energy sector remains up 52% year-to-date.
Storebrand AM maintains a neutral allocation to global equities.
Emerging market equities declined by almost 8% in local currency terms in October, significantly underperforming developed markets.
South Korea fell by almost 20%, while Taiwan, Brazil and China each declined by more than 5%. Taiwan and South Korea now account for close to half of the emerging market index following their strong AI-driven gains earlier in the year.
Despite the October sell-off, Storebrand AM maintains its overweight allocation to emerging market equities.
Norwegian equities gained 3% in October. Oil prices continued higher and reached the upper end of this year’s range before declining in early November. Equinor, which represents around 15% of the OSEBX, gained 12% during the month.
Storebrand AM maintains a neutral allocation to Norwegian equities.
Norwegian government bonds gained 0.6% in October. Inflation remains elevated and core inflation came in somewhat above Norges Bank’s estimate, although the Norwegian krone has strengthened by around 11% year-to-date, easing some near-term pressure on monetary policy.
Markets continue to price around a 40% probability of a rate increase in December. Storebrand AM therefore maintains underweight duration in Norwegian government bonds. Swedish government bonds gained almost 1% in October, but the Riksbank is expected to raise rates in November and continue tightening during 2027. Storebrand AM also maintains underweight duration in Swedish government bonds.
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