Morning Bid: A cruel quarter for bonds

Bond Markets Face Rising Yields and Fiscal Risks in a Challenging Quarter

Market Overview and Key Developments

A look at the day ahead in European and global markets from Ankur Banerjee

Rising Yields and Inflation Risks

Bond markets are staring at a brutal quarter as inflation risks due to the seven-month-long war in the Middle East heighten fears over a worsening of fiscal health across the globe, driving borrowing costs to levels not seen in decades.

Central Bank Policies and Market Sentiment

Bonds have invariably taken the centre stage as the venue for market angst, with investors positioning for an era where interest rates stay higher for longer after a hawkish shift from major central banks in September.

Impact on Stocks and AI Investment

Where has that left us? In a market where stocks are being propped up by the AI trade even as the massive investment needed for AI infrastructure leaves investors increasingly nervous while much of the action is being played out in bonds.

Global Bond Yield Movements

The yield on the benchmark 10-year US Treasury note has risen 81 basis points in the July-September quarter, on course for its steepest rise since 2022, pinning borrowing costs at a 19-year peak. [US/]

Japan’s Bond Market Response

The clearest sign of this higher rates paradigm is in Japan. The yield on Japanese 10-year bond is up 42 bps in the quarter, set for its biggest rise in over two decades. [JP/]

Investor Sentiment and Market Outlook

While rising yields have made government bonds attractive again for some investors, others remain cautious towards long-dated bonds given concerns about high government debt.

Stocks, though, have largely shrugged off the impact of sky-high yields, mainly as investors pin their hopes on all things AI.

Upcoming Economic Data and Fiscal Events

A slate of economic data later in the day will provide further clues on the state of the European economy and the monetary policy outlook. October will bring new tests in the shape of the latest US jobs and inflation data, French budget talks, a UK budget, and likely more bond issuance from tech firms.

Key Developments to Watch

Key developments that could influence markets on Wednesday:

Economic events: August retail sales for Germany, Q2 GDP data for UK, September CPI data for France, September CPI data for Germany

(By Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman)