What’s happening in bonds: November 2025

Commentary from the Betashares portfolio management desk by Head of Fixed Income Chamath De Silva, providing an overview of bond markets:

• The US government shutdown and the absence of official data can’t hide the growing US labour market weakness.
• Rising unemployment across developed economies suggests that further RBA rate cuts might merely be delayed by the hot Q3 CPI data.
• Credit markets potentially facing headwinds over the next 12 months from the surge in AI-driven issuance bumping up against a looming refinancing wall.

Government shutdown can’t hide continued US labour market weakness

With the US government shutdown now stretching past 40 days, bond markets and policy makers have been largely flying blind. The absence of critical official releases, including two consecutive jobs reports, the latest PCE print, and potentially this week’s CPI, has shifted focus to second tier and private sector indicators.

What data we can see paints a concerning picture. The Challenger Job Cuts survey showed layoffs continuing to trend higher, while the ADP employment report points to net new jobs growth trending lower, with October showing tepid net hiring following two months of outright contraction. These alternative indicators suggest the labour market deterioration that was already evident before the shutdown has likely intensified.

Powell struck a notably hawkish tone at the October FOMC press conference, downplaying the labour market weakness by stating that a December cut is far from a foregone conclusion. With US unemployment threatening the rise above 4.5% – the peak according to the Summary of Economic Projections from the September FOMC –the Fed risks a significant policy error. This is an argument being made by the newest FOMC member, Stephen Miran, who’s dissented in calling for a 50-basis point cut over the past two decisions, and has been on record as stating the neutral rate has falling and it’s important to get policy back towards a neutral policy setting as soon as possible.

As for the bond market, Treasury yields have remained largely rangebound amid the policy uncertainty, although signs do suggest that a resolution to the shutdown is around the corner (at the time of writing). However, it remains to be seen if we’ll have all the backdated data restated ahead of the next FOMC meeting in early December.

Figure 1: Selected US labour market indicators; Sources: ADP, Challenger Gray & Christmas Inc, Bureau of Labor Statistics; as at 31 October 2025

Unemployment on the rise across developed economies and implications for Australia

Labour market weakness isn’t just confined to the US, and we’re seeing a synchronised deterioration across several developed economies, with implications for Australia, despite the local market’s (current) focus on sticky inflation.

The surprisingly strong Q3 CPI print pared back rate cut expectations, with the first cut now not fully priced until mid-2026. As expected, the RBA held on Melbourne Cup Day and raised its inflation forecasts, revising up trimmed mean for December 2026 by 0.1% year-on-year and pushing out the timeline for both trimmed mean and headline CPI to return to the 2.5% midpoint to 2028. But this preoccupation with sticky inflation while downplaying accelerating labour market weakness may be misplaced.

New Zealand and Canada serve as valuable leading indicators for the Australian economy. New Zealand, as our smaller open-economy neighbour, typically experiences global headwinds first and most acutely. Canada shares key structural similarities with Australia: comparable financial sector dynamics, elevated household indebtedness, and acute sensitivity to commodity cycles. Both economies have seen unemployment surge by 2 percentage points from their cycle lows. Australia’s jobless rate is now tracking this same trajectory, albeit with a lag. If these patterns hold, Australian unemployment should breach 5% over the next 12 months, well above the RBA’s 4.5% NAIRU estimate – the rate the Bank deems is consistent with inflation around target.

Unemployment above 5% would fundamentally alter the monetary policy calculus. Despite the Q3 CPI surprise and the RBA’s extended inflation timeline, sustained labour market slack would materially constrain future inflation pressures and compel genuinely accommodative policy – which we view as a cash rate well below 3%.

Figure 2: Unemployment rate in selected economies; Sources: ABS, UK Office for National Statistics, Statistics NZ, Statistics Canada

AI-related debt issuance takes centre stage and what it means for credit spreads

Credit has been in the headlines for the wrong reasons recently following some high-profile defaults in the US syndicated loan market, most notably autoparts supplier First Brands and sub-prime auto lender Tricolor. While some commentators have conflated these issues with risks around “private credit” more generally, it’s worth clarifying that these failures occurred in the very well established “traditional” broadly syndicated loan market, with conventional bank lenders bearing the largest losses.

While obviously relevant, these loan defaults aren’t the primary concern for credit spreads in my view. Rather, the main headwinds arguably stem from issuance indigestion and spreads currently trading relatively “rich”. The AI capex boom is already a meaningful part of US corporate debt issuance and the projected spending needs over the coming years are simply eye watering. The most striking example in recent months was the record-breaking US$27 billion bond deal via the “Beignet” special purpose vehicle. This was the largest private debt offering ever, and finances Meta’s massive Hyperion data centre campus via an off-balance-sheet bankruptcy-remote structure. The Beignet transaction could signal a template for financing the next capex cycle. These bonds are fully amortising, maturing in 2049, and secured against the data centres themselves, with Meta acting as developer, operator, and long-term tenant of a campus designed to eventually draw up to 5 gigawatts of power. This structure enables Meta to preserve balance sheet flexibility while continuing to fund its AI ambitions, issuing around US$30 billion in its own name just last month.

Amid Meta’s issuance and Oracle’s $24 billion of sales this year (including $18 billion in September alone) the major US cloud platforms have already raised roughly $80 billion in 2025, with smaller AI infrastructure players such as Coreweave and Nebius also active in the primary market. This is only the beginning, with annual AI infrastructure spending projected to climb from around US$400 billion this year to over US$1 trillion by 2029, debt markets are expected to shoulder much of the load as leading technology firms shift from capital-light to capital-intensive business models. The elephant in the room is OpenAI, which has yet to access the public debt markets. How its extraordinary spending commitments (estimated at $1.4 trillion over eight years) translate into financing needs is unclear, though CEO Sam Altman has already hinted that entirely new financial instruments may be required.

What’s perhaps most challenging for credit markets is this new issuance wave will collide with the refinancing cycle stemming from the 2020-2021 issuance boom, when corporates locked in ultra-low rates and termed out their debt. The combination of a new capital cycle and refinancing cycle could overwhelm demand, particularly against the backdrop of elevated Treasury issuance persisting and USD liquidity conditions starting to tighten up.

A commonly watched indicator of USD funding market conditions is the spread between the benchmark overnight repo rate, SOFR, and the Effective Fed Funds rate, and this spread has not only widened but grown increasingly volatile, suggesting emerging pressures in short-term funding markets. This might’ve also been the driver behind the Fed’s decision to end QT in December. With corporate issuance to remain in focus over the next year and signs that liquidity is tightening, the stage is set for potential indigestion that could finally push spreads materially wider in 2026. 

Figure 3: US IG spreads across selected sectors; Source: Bloomberg

Figure 4: Largest corporate issuers across Technology and Communications sectors; Total year-to-date issuance across USD bonds; Source: Bloomberg

Figure 5: “Magnificent 7” + Oracle calendar year bond issuance; USD corporate bonds; Source: Bloomberg