A torrid month for bond markets

September proved to be a torrid month for government bond markets. Yields backed up sharply amid a jump in energy prices and an increase in actual and expected central bank interest rates, with benchmark US 10-year yields rising by about 55bps and equivalent UK and German yields up around 35bps and 25bps respectively. The increase in (relative) US yields gave significant support to the dollar, which gained around 3 cents against both the euro and sterling over the month. EURUSD has fallen to a new 2026 to date low of $1.1305 this morning, while GBPUSD has dipped to around $1.3230. EURGBP continues to edge lower, now trading at about £0.8540.

The chances of an increase in ECB and Fed rates this month have been pared back a bit further and now stand at around 25%-35%, while the market remains almost fully priced for a 25bps hike from the Bank of England at its next meeting in November, with about 85bps to 105bps of tightening expected from the three central banks over the next twelve months or so. German bonds outperformed yesterday with 2- and 10-year yields falling by around 8bps and 4bps respectively, while equivalent US and UK yields ended flat to higher overall. In equity markets, both the S&P 500 and the Stoxx Europe 600 ended in the red for the day, shedding just under 0.5%.

There were revisions to US PCE inflation data with yesterday’s release for August. They proved a good deal larger than generally expected with the annual rates of headline and core inflation for July revised down to 3.4% and 3.0% respectively from 3.7% and 3.3% previously. Relative to July, the August readings were unchanged at 3.4% and 3%, still well above the Fed’s 2% target. For the month of August, headline and core PCE prices increased by 0.31% and 0.25% respectively, a pick up from June-July but a bit lower than the average monthly increases recorded over the January-May period.

Annual HICP inflation in Germany picked up to 3.4% in September from 2.9% in August, slightly ahead of expectations (3.3%), due to a sharp acceleration in energy price inflation. On the national CPI measure, core inflation (excluding energy and food) was unchanged at 2.4% last month, helped by a dip in services inflation. Data for the Euro area as a whole are due tomorrow.

For today, economic data due include the ISM manufacturing index (September) and weekly jobless claims in the US and the unemployment rate (August) in the Euro area. Final readings for the September manufacturing PMIs are scheduled in the main economies. A large number of ECB/Fed/BoE members are due to speak over the course of the day.