Investment Weekly: Surging bond yields
7 September 2026
Key takeaways
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Government bond markets have been volatile, but credit has barely blinked. Despite the recent sell-off in sovereign debt, US investment grade (IG) spreads remain close to multi-decade tights.
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Technology stocks have done the heavy lifting in markets this year, even as global equities have lived with higher episodic volatility. The engine has been clear: AI-led investment and commodity-linked strength have driven profits, with the US tech sector up around 30% over the past 12 months.
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When the US dollar weakened in 2025, it helped oxygenate emerging market performance. But with the dollar stronger in 2026, EM returns have been more dispersed. The question now is whether dollar weakness – the so-called debasement trade – can make a comeback.
Chart of the week – Surging bond yields
Government bond yields are making headlines across the G7. US 10-year Treasury yields touched 4.8% last week, their highest since late 2023. In Japan, 10-year JGB yields breached 3.0%, a level not seen since the 1990s, while UK Gilt yields reached new highs since the global financial crisis.
But for investors it is not simply the speed of the rise or the level of yields that matter – it is the reasons for the moves. Looking beneath the surface is therefore crucial. In the US, real yields have driven the increase this year with the term premium also rising. Longer-term inflation expectations have picked up since late June but are still below the level seen coming into 2026. This suggests that the market is pricing in more than just a renewed inflation shock: concerns about fiscal sustainability, debt supply, and geopolitical risk are increasingly leading investors to demand a greater return for holding long-dated government bonds. The bond vigilantes are getting restless.
Governments may want lower borrowing costs, but investors ultimately decide what return they need to finance them. Treasury Secretary Scott Bessent has already sought to ease pressure on the long end of the US curve, including by increasing Treasury buybacks. The fact that yields have subsequently moved higher again is a reminder that the bond market cannot simply be managed by policymakers.
The good news is that historically, high starting yields and a steeper curve have tended to improve the prospective return from fixed income. Real yields are now relatively attractive by recent standards. So, the bond sell-off is a risk to watch, but not necessarily one to fear. For long-term investors, the question may increasingly be whether today’s higher yields represent a problem – or an opportunity.
Market Spotlight
A Delphic Fed shift
For years before Kevin Warsh’s appointment, investors grew accustomed to an Odysseus-like Federal Reserve. Policymakers effectively tied themselves to the mast through pre-commitment and forward guidance. With few major macroeconomic shocks, the outcome was a low-volatility environment and a Fed widely seen as predictable.
That backdrop is shifting, and the Fed appears to be changing with it under its new Chair. Ahead of the Jackson Hole symposium, markets debated whether a Warsh-led Fed would simply communicate less clearly or deliberately deploy ambiguity as a policy tool. The message now looks closer to an Apollo-like approach: Delphic communication that pushes investors to infer implications, while avoiding becoming a direct source of market turbulence.
In practice, this resembles a return to a Greenspan-era framework – broad discussions of possible future states of the world and the Fed’s reaction function, without explicit commitments. Warsh also highlighted a wide set of macro indicators he is paying attention to. So, what’s the message to markets? Become “data-watchers”, not “Fed-watchers”. But the anchor for policy remains firm: a clear commitment to the 2% PCE inflation target.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 04 September 2026.
Lens on…
Credit barely blinks
Government bond markets have been volatile, but credit has barely blinked. Despite the recent sell-off in sovereign debt, US investment grade (IG) spreads remain close to multi-decade tights. At the same time, all-in corporate bond yields are near their highest levels since the global financial crisis. That combination looks unusual – but it may also be telling us something important. Corporate fundamentals remain supportive. Balance sheets are generally strong, profits have held up, and many large investment-grade issuers have termed out borrowing at attractive rates. In contrast, concerns around fiscal trajectories and heavy government bond supply have pushed sovereign term premia higher. The traditional hierarchy between “risk-free” government bonds and high-quality corporate credit therefore looks less clear-cut than it once did. |
For multi-asset investors, that creates an interesting portfolio role for IG credit. Tight spreads limit the cushion against a growth shock, but attractive all-in yields and strong fundamentals can still deliver income and resilience. In a world where government bonds diversify less reliably, high-quality credit can help “diversify the diversifiers”.
Broadening beyond Technology
Technology stocks have done the heavy lifting in markets this year, even as global equities have lived with higher episodic volatility. The engine has been clear: AI-led investment and commodity-linked strength have driven profits, with the US tech sector up around 30% over the past 12 months. But the AI growth story is maturing, and so are the risks. On valuation measures such as price-to-book, US Technology is now the second most expensive sector, with multiples close to 2000-style levels. For investors, the key question has shifted from “will AI work?” to “how will it be financed?” With AI increasingly funded by debt, any pause in capital expenditure – whether from rates, tax changes, or softer monetisation – could hit semiconductor and hardware profits quickly. Meanwhile, free cashflow has rolled over as AI spending outpaces sales, even if balance sheets still look resilient. |
While tech profits are still set to lead the market, we expect global profit and valuation gaps between tech and the rest to narrow, with a “broadening out” of profit growth into non-US markets and 2026 earnings expectations starting to lift across other sectors.
Dollar down, EM up?
When the US dollar weakened in 2025, it helped oxygenate emerging market performance. But with the dollar stronger in 2026, EM returns have been more dispersed. The question now is whether dollar weakness – the so-called debasement trade – can make a comeback. First, debt and deficit concerns are weighing on the US bond market and across the G7. If policymakers try to cap long-term Treasury yields, it could shift volatility from bonds into FX. Second, some investors have questioned how hawkish Fed Chair Warsh will ultimately be. Markets may already be priced in for close to “maximum hawkishness”; but cooler labour market or inflation data could force a rethink and pressure the dollar. Third, if the AI capex boom falters, it could challenge the US exceptionalism narrative in markets that has underpinned dollar strength. |
However, a broadening out of profit growth towards laggard sectors and regions beyond the US, could provide the oxygen emerging markets need for another leg of outperformance.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 04 September 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 04 September 2026.
Market review
US inflation jitters and fiscal uncertainty continued to fuel volatility in Treasuries ahead of key US employment and inflation reports, while other major sovereign yields also drifted broadly higher. Equity markets were mixed as rising global sovereign bond yields weighed on sentiment: the S&P 500 traded modestly higher, while the Philly Semiconductor index and the small-cap Russell 2000 extended recent weakness. In Europe, many bourses weakened on rising growth concerns, while the FTSE 100 traded sideways, supported by energy and materials. Asian stock indices diverged: the tech-heavy Kospi fell further, alongside a decline in the Nikkei 225, while Chinese equities rose. In FX, the dollar slipped against major currencies, notably the yen. Oil prices rose sharply in response to a flare-up in the Middle East conflict, while gold recouped some of its recent pullback.
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