Key Takeaways
- Global bonds are set for their worst month in years due to rising inflation and energy costs.
- Stocks have shown better performance, with Asia markets largely unaffected by bond yield increases.
- Benchmark 10-year US Treasury yields are near their highest point since 2007.
Global bonds are facing a challenging September, with yields set for their worst month in years. This is primarily due to deteriorating government finances, a surge in bond issuances, and rising inflation, exacerbated by the ongoing US-Israeli war on Iran, which has kept energy costs elevated.
In contrast, stocks have fared better, with markets in Asia largely unaffected by the rise in bond yields. The MSCI Asia-Pacific index, excluding Japan, rose 0.2% in early trading and is on track for a monthly decline of just over 1%. Japan’s Nikkei rose 0.9% and is set to end the month little changed, while South Korea’s Kospi is headed for a monthly gain of 1.4%.
The resilience of equity markets can be attributed to strong corporate earnings, the strength of the global economy, and continued optimism around artificial intelligence. According to Citi’s head of Asia-Pacific trading strategy, Mohammed Apabhai, the equity market’s reaction to rising bond yields has been more positive than expected, with the growth in nominal GDP driving earnings optimism, particularly outside the tech sector.
Despite the positive performance of stocks, the impact of higher borrowing costs on companies is significant. A persistently higher risk-free rate increases the cost of refinancing for companies and could weigh on growth. However, so far, this has not had a substantial impact on stock prices.
Benchmark 10-year US Treasury yields are holding near their highest point since 2007 at 5.2383%, with a potential rise of nearly 50 basis points this month, the largest in about two years. The 2-year yield fell slightly to 4.8889% after New York Federal Reserve President John Williams pushed back against expectations for earlier policy tightening, though yields remain more than 50 basis points higher for the month.
Other major economies are also experiencing higher bond yields. In Japan, yields are near multi-decade highs, while 10-year government bond yields in Germany and France hit 17-year and 18-year peaks this week, respectively.
While the rise in bond yields poses a significant challenge for companies and could impact growth, the equity market’s reaction has been relatively limited. This suggests that investors are more focused on other factors, such as corporate earnings and the global economic outlook, in their investment decisions.
The dollar has also gained strength in currency markets, reflecting the impact of higher bond yields and the overall economic environment.
