16.09.2026 - Bond Market Stress
Stress in global bond markets continues to build. With three major central banks in focus within just three days, monetary policy is once again taking center stage.
The US 10-year Treasury yield climbed above 5% yesterday, reaching its highest level since 2007, as persistent inflation concerns, elevated oil prices and expectations of tighter monetary policy continue to put pressure on government bonds.
The move is not limited to the United States. Bond yields remain elevated globally, with Japan’s 10-year yield around 3%, while European government bond yields are also trading near multi-year highs.
Today, yields are moving largely sideways as investors wait for tonight’s Federal Reserve decision. Markets now widely expect the Fed to raise rates by 25 basis points to 4.00%.
And the Fed is not the only major central bank in focus this week.
Tomorrow, the Bank of England is expected to keep interest rates unchanged at 3.75%, despite UK inflation accelerating to 3.1% in August from 2.9% in July.
On Friday, the Bank of Japan is expected to raise rates by 25 basis points to 1.25%, which would bring its policy rate to the highest level in 31 years.
Markets:
Equities: Rebounding after recent losses
Bonds: yields moving sideways - US 2y yield above 2.62%, US 10y yield above 4.97%, Japan 10y yield 3.0%
Commodities: Oil prices moving lower, WTI at USD 102/barrel and Brent around USD 105/barrel
Precious metals prices higher, gold USD 4’355/oz, silver above USD 64/ozCurrencies: US dollar almost unchanged - Japanese Yen unchanged USDJPY 155
Cryptos: continue to fall - Bitcoin towards USD 75k
Volatility: The VIX index falls back below again 17 (opportunity for hedging!)
My View: What a difference a few weeks can make. Before Jackson Hole, almost no market participants expected a September rate hike. Even a week ago, investors remained divided over whether the Fed would actually move.
My view remained clearly outside the broad market consensus: With Iran war to start, I said the Fed needs to raise rates again to address persistent inflationary pressures.
Before the Iran war and the renewed oil shock, markets expected the Fed funds rate to be around 3% by September. Tonight, it is expected to move to 4%. A 25-basis-point hike itself should not have a major impact on markets, as it is now largely priced in. In fact, the decision could provide some short-term relief.
However, the bigger issue goes far beyond tonight’s decision. In my view, the Fed is still running behind the curve, and the bond market already started to recognize it.
I therefore expect the upward pressure on bond yields and downward pressure on bond prices to persist, even if tonight’s decision temporarily calms markets.
The second oil-price shock within a relatively short period is increasingly feeding through to inflation and, in my view, could have a broader economic impact than the first shock in May.
Much will depend on the oil price from here. Oil inventories are tighter and strategic reserves provide considerably less flexibility than during the first shock. This reduces the ability to cushion another major supply disruption.
I therefore expect upward pressure on oil prices to persist, with the risk of another substantial price spike remaining elevated.
If the current environment persists, I believe another Fed rate hike will ultimately be necessary.
Interestingly, the sentiment index has moved back into “Fear” territory, yet broader financial markets are still showing remarkably little genuine stress.
This divergence deserves attention. As highlighted in my Weekend Mailing, investor complacency could suddenly come to an end. If sentiment turns decisively, today’s highly crowded and leveraged market could quickly face a situation where almost everyone tries to exit through the same door at the same time.
In such an environment, a market drawdown could unfold very quickly.
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