The Week in Markets
The Fed unanimously raised rates by 25bp to 3.75 to 4.00%, its first hike in more than three years, while the 10-year Treasury yield hovered around 5%. The Bank of Japan followed on Friday, hiking 25bp to a 31-year high of 1.25%. Market commentary focused on Fed credibility, bond allocation, and AI's credit market impact.
J.P. Morgan Asset Management highlighted the FOMC's unanimous decision to lift the target range to 3.75 to 4.00%. The committee revised its growth forecasts upward to 2.3% for 2026 and 2.4% for 2027, raised core PCE expectations to 3.4% for this year, and established a median dot plot of 4.1%, signalling one final rate hike in 2026. For the second consecutive meeting, Chair Kevin Warsh abstained from submitting individual projections and openly critiqued pure data dependence as a "dangerous preoccupation".
Meanwhile, UBS noted that with the 10-year US Treasury yield hitting 5%, markets are pricing in roughly three more hikes through mid-2027, an outlook the firm views as overly aggressive compared to its own expectation of a single remaining hike in December.
Felipe Villarroel of TwentyFour Asset Management argued that this decisive messaging successfully restored the central bank's inflation-fighting credibility. Paradoxically, this is positive news for long-duration bonds because it helps prevent a runaway inflation sell-off. David Chao at Invesco agreed, interpreting the move as a strategic recalibration to reinforce credibility rather than the kickoff of a prolonged, aggressive tightening cycle.
However, Allspring Global Investments provided a vital caveat: front-loaded rate hikes do little to curb supply-driven inflation, particularly as the refining crack spread hits a historic record of $59.95 a barrel.
The consensus from commentators was that AI's market footprint has shifted from equity to fixed income. State Street argued AI is now a credit-cycle narrative rather than a technology play, driven by massive infrastructure capital expenditure. Consequently, the best credit opportunities lie with structural enablers, like power, industrials and infrastructure, rather than the software model builders.
Andrew Dewar of Columbia Threadneedle quantified this shift, noting hyperscaler debt issuance ballooned from $20bn in 2024 to $136bn in 2025, and $256bn so far in 2026. This supply deluge leaves the technology sector two standard deviations cheap to the US corporate index on technical flows rather than fundamentals, with Oracle climbing from tenth to the largest risk contributor in global corporate benchmarks over the past year.
Apollo's Brian Weinstein and John Cortese framed this as the largest investment-grade issuance cycle in history, with four companies issuing $187bn in a single year. They anticipate "the equitization of fixed income", warning that bond buyers must now evaluate lease exposures, project tail risks and negative convexity. Fed Chair Warsh reinforced this dynamic, citing the hyperscalers' competition for capital as a primary driver behind rising long-term yields.
On portfolio allocation, UBS, Allspring and Invesco largely agreed. UBS favours adding duration selectively in high-quality bonds while staying cautious on the longest maturities, where fiscal concerns, heavy issuance and price-sensitive buyers could keep term premia elevated. Allspring's Matthias Scheiber and Rushabh Amin find real yields most attractive in the 5-to-10-year belly, remaining cautious on long-dated Treasuries. Invesco's Chao is a modest outlier, viewing longer-dated bonds as increasingly attractive diversifiers as economic growth slows.
A useful dissent comes from Dimensional's Wes Crill, who cautions against rotating out of equities on yield alone. He notes that the US equity premium has historically been unrelated to interest rate levels, averaging 9.9% in below-median-rate years and 8.1% in above-median years since 1927, a difference that is not statistically reliable.
AGF, WTW and Man Group converged on where the build-out gets stuck. AGF's Pulkit Sabharwal argued natural gas and nuclear will have to carry AI's power demand, citing BloombergNEF's projection of data-centre consumption at roughly 106GW by 2035, more than double today. WTW's Lay See Ong wrote that in Asia the challenge is no longer attracting capital but delivering the infrastructure: power availability, grid resilience, water, land, equipment and community acceptance, against a pipeline above 19GW and capital requirements approaching $750bn.
Man Group's Albert Chu made the allocation case for listed infrastructure as a distinct asset class, about $8trn of market capitalisation with revenues often linked to inflation, after a decade out of favour behind technology, and with more than $150trn of cumulative investment needed by 2050.
Invesco's David Chao made the structural call: currency markets still price US inflation returning to 2%, but if it settles closer to 3%, investors may stop holding dollars simply because US rates are higher and favour currencies backed by stronger external balances and lower inflation risk. He named the yen, with the Bank of Japan's hike now delivered, plus the Korean won and Taiwan dollar, both central to the semiconductor supply chain and both with central banks that pass his credibility test, and sees the yuan supported by similar fundamentals.
Wed 23 Sep. Japan and Australia flash PMIs (Sep), overnight; 09:00 Eurozone flash PMIs (Sep), with France and Germany from 08:15; 09:30 UK flash PMIs (Sep); 14:45 US flash PMIs (Sep).
Thu 24 Sep. 08:30 SNB rate decision; 13:30 US initial jobless claims and Q2 current account; 15:00 US new home sales (Aug).
Fri 25 Sep. 13:30 US durable goods orders (Aug, advance); 15:00 University of Michigan sentiment and inflation expectations (Sep, final).
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