Oil is now setting the pace for bond yields

Yields break multi-decade highs across the G7

Treasuries sold off for a seventh straight session on Wednesday, taking the 10-year to 5.3% for the first time since 2007 and the 30-year to a 24-year high, according to UBS's Chief Investment Office. Global government bonds had their worst quarter since 2024.

Amundi shows how far the move has spread. The US 5-year is above 5% for the first time in two decades, the German 10-year is at 3.6%, its highest since 2009, and Japan's 10-year is above 3%. Amundi puts the higher level of yields down to heavy government and corporate borrowing.

The UK is the sharp end. The 30-year gilt rose above 6% on Friday, its highest since 1998. August debt interest was £8.8bn, the highest August on ONS records, and the Budget is on 28 October.

Oil is pushing yields up, and central banks have few good answers

Columbia Threadneedle traced the previous week's selloff to US business activity growing at its fastest pace since 2021, a weak $70bn five-year auction and higher oil, as hopes of a deal to reopen the Strait of Hormuz faded.

UBS's Paul Donovan spells out the bind. Central banks are supposed to look through an oil shock. If they signal they care about oil, their only remedy is to weaken the rest of the economy, which makes it more likely that rates have to rise to "recession-inducing levels". He says we are not at that stage, but talk about oil already has markets contemplating more repressive policy.

Payrolls rose 29,000 in September, well short of forecasts

Economists had expected 84,000. Unemployment rose to 4.2%, and July and August were revised down by a combined 60,000. Treasury yields fell and stocks rose after Friday's release.

Lazard Asset Management's Ronald Temple had argued before the report that a strong number was the bigger risk for markets. His reference point is 2023, when the 10-year's climb to about 5% coincided with an 11% fall in the S&P 500, as corporate debt became more attractive to pension funds than equities priced at about 19.7 times earnings. When Temple wrote, the 10-year was near 5.3%, Moody's Baa yield was 6.7% and the S&P traded at about 19 times forward earnings. He expects non-US markets to hold up better, helped by lower valuations and milder inflation.

Conditions are still loose, and managers split on the dollar

PIMCO's Tiffany Wilding and J.R. Scott note that central banks are paying more attention to broad financial conditions. On the Fed's FCI-G measure, the second-quarter reading of -0.9 is estimated to add about 0.9 percentage points to US growth over the coming year, far more support than in 2022 and 2023. Equity gains are doing most of the work.

J.P. Morgan Asset Management's Nicholas Wall says stronger growth outside the US could point to a weaker dollar, with STOXX Europe 600 earnings up more than 20% year on year in the second quarter. Amundi's Federico Cesarini sees the September hike closing the window for broad dollar weakness for now; a renewed decline would need inflation, and then the Fed, to turn first. Amundi expects the Fed to deliver less than markets price, which should cap any rebound.

AI issuers are now around 19% of US investment grade non-financials

Robeco puts AI-linked issuers at around 19% of the US investment grade non-financial index, up from about 4% in 2022. Hyperscalers alone are just over 5% of the benchmark. Outside the infrastructure names, Robeco sees little sign yet of AI lifting corporate profits.

AllianceBernstein's Chris Kotowicz compares the build-out to the US shale cycle. Capital follows the bottleneck, and compounding productivity eventually turns scarcity into abundance; the cost of generating a token is already falling. Companies that profit from scarcity today may not keep their edge once it fades.

Economic calendar

Mon 5 Oct:

15:00 US ISM services PMI (Sep)

Tue 6 Oct:

13:30 US trade balance (Aug)

Wed 7 Oct:

19:00 FOMC minutes (September meeting)

Thu 8 Oct:

12:30 ECB account of the September meeting

13:30 US initial jobless claims

Fri 9 Oct:

15:00 University of Michigan consumer sentiment, preliminary (Oct)

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