During the month the Trust returned 4.7%, while the Index returned 4.4%. Bond yields in all the major markets remained very volatile over the month as investors were concerned over the deepening credit crisis and the potential damage to the economy. In the US, despite the deterioration in economic data, bond yields moved slightly higher.The passage of the US financial aid package and further aggressive interest rate cuts globally led to higher yields on longer-dated bonds as the risk of inflation rose, particularly in the US. Outside the US, output and employment data in the Eurozone and the UK continued to weaken and inflation remained elevated. Overall, bond yields in Europe declined slightly, largely as a result of weaker output and confidence data, although the UK gilt yield rose marginally.Japanese economic data tended to be weak during October although bond yields remained flat. The Trust remains less sensitive to falling interest rates than the index. Currency markets were volatile, with the US dollar appreciating significantly against European currencies and Sterling, whilst the Yen was a major beneficiary of currency risk aversion.In response to the strength of the US dollar and the Yen, we eliminated exposure to both currencies while establishing positions in Sterling and the Australian dollar, Norwegian krone, Canadian dollar and Mexican peso. These currencies have become relatively cheap in our view and already reflect a lot of bad economic news.Given the policy response of the authorities globally, and the amount of bad news already taken on board by markets we believe the major risks over the medium term are that growth and inflation prove stronger than expected.
