Another difficult week for bonds

Friday’s rally softened what had been a difficult week. The S&P 500 recovered 0.7% after a weak US employment report, but still slipped 0.3% over five days. Britain’s FTSE 100 fell 2.2%, its worst week since April, as rising gilt yields hit banks, housebuilders and other rate-sensitive companies. R

Bond markets remained far less relaxed. The US 10-year Treasury yield ended near 5.28% after touching 5.34% during the week, while the UK equivalent finished above 5.3%.

S&P 500
-0.3%
Last week

FTSE 100
-2.2%
Last week

US 10-year gilt
5.28%
Last week

Brent Crude
$102.77
Last week

The big picture

Jobs cool, but the bond market still isn’t convinced

Friday delivered the sort of economic news that would normally help bonds. The US added only 29,000 jobs in September, well below the 90,000 economists expected, while unemployment rose to 4.2%. August’s employment gain was also revised down sharply. Reuters

Investors responded by cutting the probability of another Federal Reserve rate rise in October. Shares rose and the dollar weakened.

Yet Treasury yields still finished higher.

That tells us something about the mood in markets. Investors aren’t simply worried about the Fed’s next meeting. They are thinking about inflation, government borrowing, oil above $100 and the extraordinary amount of capital being committed to artificial-intelligence infrastructure.

For long-term investors, the cost of money remains one of the biggest forces shaping markets.

Last week: Three things that mattered

1

Bond yields reached their highest levels in decades

Thursday provided the week’s biggest market warning.

The US 10-year Treasury yield reached 5.34%, its highest level in 24 years. It later eased, but still ended the week around 10 basis points higher, marking a fifth consecutive weekly rise.

Britain experienced much the same thing. The benchmark 10-year gilt yield briefly reached its highest level since 2007, while longer-dated UK borrowing costs also climbed sharply. The FTSE 100 suffered as the bond sell-off spread into equities.

Why does this matter?

A 5% government bond yield changes the investment calculation. It raises mortgage and company borrowing costs while also giving investors a credible alternative to shares.

Equity markets can cope if company profits keep growing quickly. They become much less forgiving when earnings disappoint.

2

Weak US jobs data changed the Fed debate

September payrolls increased by just 29,000, while unemployment rose from 4.1% to 4.2%. Wage growth also slowed, with average hourly earnings rising only 0.1% during the month. Reuters

Before Friday, investors were still debating whether the Federal Reserve might follow September’s rate increase with another rise in October.

After the employment report, markets put the chance of an October increase at only around 23%, down from more than 60% a week earlier. Reuters

There was some help from inflation too. August PCE inflation, the Fed’s preferred measure, rose less than economists expected. Reuters

A softer labour market gives the Fed time. But one weak payroll figure doesn’t automatically signal recession: there has been little evidence so far of widespread layoffs.

3

Governments stepped in as the energy shock continued

Oil remained above $100 a barrel, despite easing late in the week.

On Friday, G7 countries agreed to release 100 million barrels of diesel and crude oil from emergency reserves, coordinated through the International Energy Agency. The measure aims to ease the supply strain created by disruption linked to the Iran conflict. Reuters

The decision helped take some heat out of crude prices, with Brent ending at $102.77.

Yet this remains an inflation problem rather than simply an energy-market story.

High diesel and oil prices raise transport costs across almost every industry. If they stay elevated, businesses either accept lower profit margins or pass some of those costs to customers.

Central banks are watching that process closely.

This week: What investors should watch

Federal Reserve minutes: Wednesday

Minutes from the Fed’s 15-16 September meeting arrive on Wednesday. That was the meeting where policymakers raised rates for the first time since 2023. Federal Reserve

Friday’s jobs report makes the document more interesting.

Investors will want to know how strongly policymakers argued for further tightening, particularly given that the next Fed meeting isn’t until 27-28 October.

If the minutes show deep concern about persistent inflation, bond yields could stay high even if an October rate increase looks less likely.

Earnings season begins to stir

Third-quarter reporting starts quietly this week before the big US banks arrive the following week.

PepsiCo and Delta Air Lines are among the larger companies reporting. Markets expect S&P 500 earnings to have grown more than 30% from a year earlier, so expectations are already demanding.

Delta should provide useful evidence about consumer demand and the effect of high fuel costs. PepsiCo can tell investors whether households are accepting further price increases or switching towards cheaper alternatives.

The numbers matter, but company forecasts will matter more.

France’s bond market

One of Europe’s biggest risks currently sits outside the equity market.

France’s 10-year government bond yield is close to 5%, its highest since 2002, while the gap between French and German borrowing costs has widened sharply. France plans record bond issuance next year as its government tries to reduce a debt burden approaching 120% of GDP. 

Markets will watch negotiations over the 2027 budget and the response from bond investors.

Further selling would increase pressure on European borrowing costs more widely and could weigh on the euro.

Will the emergency oil release work?

The first reaction to the G7 reserve announcement was encouraging: oil prices fell.

Now investors need to see whether the effect lasts.

If Brent moves convincingly below $100, inflation expectations and bond yields could ease. If geopolitical disruption overwhelms the stock releases, energy prices may return to being the dominant influence on central-bank expectations.

Investment Insight

AI is becoming a bond-market story too

Most investors think of artificial intelligence as an equity story involving Nvidia, Microsoft and other technology companies.

Increasingly, it is also about who provides the money.

AI data centres, semiconductor factories, power supplies and network infrastructure require enormous amounts of capital. Reuters reports that the rush to finance this expansion has become one factor putting upward pressure on global borrowing costs. Reuters

Micron offered a good example last week. Its latest revenue forecast comfortably beat expectations as demand for high-bandwidth memory used in AI data centres continued to grow. Customer commitments increased sharply too. Reuters

Strong demand is good for profits. But the scale of the spending also matters.

Governments are issuing large amounts of debt while technology companies are competing for many of the same pools of capital. More borrowers chasing capital can mean higher required returns.

That helps explain an unusual feature of current markets: AI can support share prices while simultaneously contributing to higher bond yields that make expensive shares harder to justify.

For a diversified investor, this is another reason not to treat technology and bonds as unrelated parts of a portfolio. The same economic forces can affect both.

Five Things I'll Be Watching

  • US 10-year Treasury yield – Staying above 5% would keep pressure on equity valuations and borrowing costs.
  • Fed minutes – Investors want to know whether September’s increase was a one-off or part of a longer tightening cycle.
  • Oil below or above $100 – The success of emergency reserve releases could shape inflation expectations.
  • Early company results – Delta and PepsiCo should offer useful evidence about consumers, pricing and rising costs.
  • French bonds – Fiscal worries have pushed borrowing costs sharply higher and could become a wider European issue.

Final thought

Friday’s weaker employment report gave equity investors some relief, but it didn’t solve the bigger problem facing markets.

Government borrowing costs remain high, oil still trades above $100 and investors can now earn more than 5% from parts of the government bond market.

But, corporate earnings remain strong and the AI spending cycle continues. Whilst these remain strong markets can shrug off other concerns. Earnings are key.