Global Markets Between Meetings

Government bonds came under pressure around the world over the past month. Investors have been demanding greater compensation to hold longer dated debt, and the average yield on sovereign debt worldwide has reached 4%, a level last seen in 2007. Yields in the UK and US are higher still, with 10-year government bonds yielding around 5.5% and 5.2% respectively at their peaks this month. The move was broad based. Japan’s 10-year yield reached 3% for the first time since 1996, and Germany’s 10-year Bund yield rose to its highest level since 2011. In the US, the Treasury attempted to steady the market by increasing its buyback programme, but with little success in holding yields down. The episode highlights how little room policymakers have when the underlying concerns are persistent inflation and heavy government borrowing.

The UK was among the markets hit hardest by the sell off, given its high borrowing needs and stretched public finances. The 30-year gilt yield rose to its highest level since 1998, and a new 30-year gilt was sold at the highest yield at any gilt auction since the Debt Management Office was established. Higher borrowing costs erode the government’s headroom against its fiscal rules, and tax increases at the 28 October Budget are now widely expected.

The Federal Reserve added to the pressure. The Fed raised interest rates by a quarter point, taking the target range to 3.75% to 4.00%, its first increase since July 2023. It also indicated that it expected to raise rates once more this year. Markets are now pricing three additional increases by the middle of 2027. The decision has been widely read as Kevin Warsh acting independently of the White House, and it is expected to test his relationship with President Trump. While uncomfortable politically, a central bank willing to act against political preference should support confidence in its commitment to price stability over time.

Energy markets reinforced the inflation concern. Renewed hostilities between the US and Iran, including strikes on shipping near the Strait of Hormuz, took Brent crude back to $100 per barrel for the first time since July. By the second week of the month oil had risen by more than 18% in September. For energy importers such as Europe and Japan, higher oil prices feed more directly into inflation, adding to pressure on their bond markets.

Against this, there was an unusual degree of engagement between the US and China. Xi Jinping made his first state visit to the US in eleven years, the second meeting between the two leaders this year following the Beijing summit in May. Substantive outcomes were limited, with differences over Iran, Taiwan and trade left unresolved, but the tone marks a notable improvement in the relationship between the world’s two largest economies. Both leaders also face domestic pressures, with the US midterm elections little more than a month away and preparations beginning for China’s Party Congress.

In Europe, the political landscape continued to fragment. The AfD won 43.8% of the vote in Saxony-Anhalt, and two weeks later took around 38% in Mecklenburg-Western Pomerania, where the CDU lost all representation. In Berlin, by contrast, Die Linke finished first on the left, underlining that voters are moving away from the centre in both directions. The results add to pressure on Chancellor Merz and fit a broader pattern of support moving away from established centre parties.

Within technology, questions over how the AI build out is financed sharpened. Goldman Sachs and Morgan Stanley have asked the major rating agencies to treat OpenAI and Anthropic as investment grade borrowers upon listing, despite OpenAI reporting a $20.9 billion operating loss on $13.1 billion of revenue in 2025 and Anthropic not expecting to break even until 2028. There is a recent precedent, SpaceX received investment grade ratings shortly after its June listing, yet its bonds have since traded at spreads considerably wider than that rating would imply, suggesting the bond market is forming its own view of the risk.

At the same time, a series of security incidents involving frontier AI models has prompted calls from within the industry to slow development. The most serious came in July, when OpenAI’s AI agents broke out of a controlled testing environment and hacked the software company Hugging Face. This month the Australian government revealed that an OpenAI agent had also broken into a government health statistics website in June in one of the first known cases of an AI system hacking a government website. Anthropic’s chief executive Dario Amodei called on developers to “pace the frontier”, a message quickly backed by the heads of OpenAI, Google DeepMind and xAI, although not everyone in the industry agrees. OpenAI went further, cancelling the release of its latest model after safety concerns emerged in testing. A deliberate slowdown led by the largest developers would be a notable shift for a sector whose valuations, and increasingly its borrowing, rest on the assumption of rapid progress.

Changes to Model Portfolios

Last month we reduced our bond holdings in favour of equities, and events since have backed that decision. For now, markets are more worried about inflation and interest rates than about a slowing economy. When that is the case, bonds struggle to act as a diversifier, because yields rise with inflation fears rather than falling to cushion equities, and that is exactly what we saw this month. We are still mindful of the risks in fixed income, not least stubborn inflation and the sheer size of government debt. That said, the sell off has pushed government bond yields to levels that look increasingly attractive, offering income that has been hard to come by for much of the last twenty years. Corporate bonds, on the other hand, pay only a small premium over government bonds at the moment, so there is little extra reward for taking on additional credit risk. With that in mind, we are considering adding to government bonds, which should also hold up well if the market’s attention turns from inflation to growth.

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IC meeting date 28^th September 2026. The information and commentary contained in this document is based on views as at 1^st October 2026 and may be subject to change.