Market Review 28th September 2026
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Are rising bond yields becoming the market's pressure point?
Summary
Bond yields moved sharply higher last week as investors weigh the risk that tighter monetary policy will become prolonged or disorderly, with this week's economic data being important markers for this debate
The Xi-Trump summit indicated the possibility of an extension in the trade truce but left broader US-China tensions largely unresolved, keeping attention on China's Purchasing Managers' Index (PMI) data and the outlook for earnings
Equities remained resilient despite higher yields, but narrow leadership in technology and AI-linked stocks leaves markets vulnerable if growth or inflation data disappoint.
Market Review
Bond yields: the risk is disorder, not simply rising
The latest data do not suggest that the global expansion is running out of momentum. Mid-month PMI surveys in the US and eurozone improved further, while US growth, employment and consumer spending indicators remain resilient. Against that backdrop, the case for tighter monetary policy has strengthened: inflation remains too persistent for comfort, and a further rate rise or two would not necessarily be enough to derail activity.
The issue for markets is less whether interest rates move modestly higher, and more whether bond yields continue rising in an orderly way. Central banks have been slow to respond to renewed inflation pressure, perhaps unsurprisingly given the supply-side nature of the shock. They are now in a challenging position – government borrowing remains high; inflation expectations are sticky; and there are few signs of the deflationary forces anticipated this time last year. If investors demand a higher risk premium for holding bonds, yields could overshoot and put pressure on equities, credit and other risk assets.
A gradual rise in yields can be absorbed if earnings continue to grow and economic activity stays firm. A disorderly rise is more problematic. It would challenge equity valuations, particularly in the more expensive parts of the market where expectations are already high, including US and technology-related exposure. It would also reduce the appeal of lower-quality credit (bonds, loans, or debt issuers that major agencies rate below investment grade), where spreads may not fully compensate investors for tighter financial conditions.
We remain constructive on the economic and corporate backdrop, but increasingly alert to the risk that bond markets become the transmission channel for a broader risk-asset correction. In our view, tighter developed-market monetary policy is justified by the combination of steady growth and persistent inflation. However, the balance of risk would change if yields continued to rise sharply from here. The political landscape for the US and UK also becomes increasingly relevant over the next 12-18 months.
With the midterm elections approaching in the US and approval ratings for President Trump low; the risk of the Republicans losing the House of Representatives has risen. Senate control remains finely balanced. A divided Congress could constrain fiscal policy and complicate negotiations around spending, borrowing and trade. In the UK, higher borrowing costs reduce room for manoeuvre for Prime Minister Andy Burnham and Chancellor John Healey. The upcoming Labour Party conference should provide more insight into the government’s priorities for this parliament, but fiscal uncertainty is likely to remain an important market focus in the short to medium term.
The key indicators are inflation data, wage growth, central bank guidance and the behaviour of longer-dated bond yields. Energy prices are also key: even if crude stabilises, tight diesel and refining markets could keep cost pressures alive. For now, the foundations of the expansion remain intact, but the margin for error is narrowing.
The week ahead
US inflation, Gross Domestic Product (GDP) and payrolls: The combination of Personal Consumption Expenditures (PCE) inflation, the GDP update and payrolls will be the main test of whether the US economy is still strong enough to justify tighter-for-longer US Federal Reserve policy.
China PMI data: Investors will look for signs of whether export strength can continue to offset softer domestic demand, particularly after the Xi-Trump summit left broader US-China tensions unresolved.
Eurozone inflation: The release will help shape expectations for European Central Bank policy at a time when activity surveys have improved but inflation risks remain a concern.
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