Weekly market commentary

This week has been dominated once again by developments in bond markets as investors continue to reassess the outlook for inflation, central bank policy and government borrowing requirements. Government bond yields moved sharply higher across most developed markets, with yields in the UK hitting post-2008 highs, reversing much of the decline seen earlier in the summer. Rising energy prices, ongoing tensions in the Middle East and renewed concerns around fiscal deficits all contributed to the sell-off, while investors increasingly questioned whether inflation could prove more persistent than previously expected, continuing the higher-for-longer interest rate debate.

The move higher in yields has been particularly notable given the efforts by US Treasury Secretary Scott Bessent to reduce borrowing costs through measures such as increased Treasury buybacks and debt management operations. Much of that progress has now been unwound, highlighting the extent to which market concerns over inflation and fiscal sustainability continue to outweigh policy efforts aimed at lowering borrowing costs. Comments from Federal Reserve speakers later in the week of expectations of a moderating inflation outlook did, however, help yields retrace a portion of their rise.

In Europe, incoming data did little to alter the market narrative. Headline inflation rose to 3.3% as expected, while core inflation eased slightly and unemployment ticked higher. Business activity surveys remained consistent with continued expansion, suggesting that growth is moderating rather than stalling, even as higher energy prices continue to present an upside risk to inflation.

Similar dynamics are also afoot in Asia, with Bank of Japan Governor Kazuo Ueda signalling that policymakers would actively debate another interest rate increase, potentially as soon as this month, if inflation risks continue to build. The comments reinforced expectations that Japanese monetary policy is moving further away from its ultra-accommodative stance, contributing to a rise in Japanese government bond yields. An immediate beneficiary of this update was the Yen, which rallied against the US dollar during the week. Market participants largely attribute the move to rising expectations of further Bank of Japan tightening as well as a potential “rate check” by Japanese authorities.