Seismic has been used to describe the recent moves in Sovereign yields; the quarter was characterised by bond market volatility and September rate hikes. The shambolic war in the Middle East, rising fuel costs, widening crack spreads, diesel shortages, inflation fears, worries about fiscal deficits and Central Bank action/expectations have driven yields to levels not seen for many decades. At the same time, the IMF and other institutions have warned about the level of deficits in developed economies, whose balance sheets continue to deteriorate.

Sovereign interest rates have been a part of the story since the US/Iran war started and it feels like they have traded in lockstep with the oil price since February. Yields on US Treasuries are over 5% from five years out and US Treasury Secretary Bessent’s announcement of a $6bn bond buyback did not have the desired effect. The US Treasury is clearly concerned about borrowing costs across the curve and signalled that it would increase buybacks in the ten to thirty-year area, which had the effect of pushing down yields, but only for a couple of days… They remain the owners of a $40tn debt problem, 126% of US GDP.

The Federal Reserve did raise the US base rate, and new Chairman (number 17) Kevin Maxwell Warsh (pictured) has established some credibility. Markets had expected a hike and to have not delivered would have unsettled risk assets. Try telling that to his boss, who commented incoherently via his usual channels, returning to Fed interference and pressure, and announced that rates should be at 1%. The question now is when and how many more times they will hike rates again, their recent meeting minutes did not show an immediate appetite for a series of hikes. Their focus on data, rather than market pricing, could push them into a sustained series of hikes if inflation becomes embedded. Recent employment numbers were weaker than expected, which took some of the heat out of the rate rise case but were not too weak to cause concern (a la Goldilocks, not too hot, not too cold...)

The US economy is proving to be remarkably resilient and equity markets have hit new highs amid strong economic numbers and an exceptional earnings season. There is much debate about whether or when high rates will begin to affect equities.

European bonds have had a torrid time. The ECB hiked in September for the same reasons as other Central Banks, but they must also deal with some difficult pressures, with Europe in political turmoil and elections looming across the bloc. The German Chancellor, Friedrich Merz, has suffered some disastrous defeats (his words) as the AfD received an unprecedented level of votes. France is in an even worse position as the far-right gain momentum, and they still have no budget. The rout in French bonds has become the focus as they suffer dislocations not seen since the Eurozone debt crisis of 2011. German Bund/ French OAT yield spreads have hit levels over 100bp (nearly at 160bp, approaching the Eurozone sovereign debt crisis wides of 190bp).

The ECB delivered an expected 25bp hike in September and there are probably more to come. The Eurozone economy has withstood elevated energy prices rather more robustly than feared and continues to print some healthy, if not spectacular, GDP and PMI numbers. The Bank of Japan joined in as well with a hike in rates and we are seeing JGB yields hitting levels not seen since their asset bubble popped in 1990 (just after I left the Gilt market in Tokyo). Ten-year JGBs had an 8% yield then and declined steadily throughout the 1990’s, hitting 3% in 1996, (and ultimately turning negative in 2016). They currently stand at 3.1%. 

The UK economy has also withstood these geopolitical and economic factors better than anticipated, even amidst a period of our own political turmoil. Gilts have had a volatile time though, ten-year now stands at 5.5% and the thirty-year at 6%. Burnham has big plans to spend money he doesn’t have (to be fair no different to most other British PM’s) but without tackling our spiralling welfare bill. He has said he will stick to the fiscal rules, but his spending plans have to be funded somehow, and we look forward to some creative accounting. Reclassifying some liabilities as infrastructure investment does not make them go away and if new Chancellor Healey, half of whose ‘headroom’ has been wiped out by the rise in Gilt yields, issues his own War Loan it will still be seen as Government debt.

Corporate credit spreads have widened a little but not dramatically. Issuance remains active and Amazon and Google now account for £10bn of sterling issuance this year, the sterling deal from Amazon raised £4.25bn from a book of over £12bn and it has performed reasonably well in the secondary market. In total, hyperscaler debt issuance has been over $200bn over 2026 so far and their borrowing plans remain vast. Most of what has been issued trades poorly in the secondary market despite offering some generous spreads, although investor appetite, for now, is unabated. Rating agencies have enthusiastically, but possibly incorrectly, granted Investment Grade ratings to the likes of SpaceX, whose paper is now the worst post deal performer ever, with some of its issues offering nearly 100bp higher yields. The wider system is now involved as Nvidia is seeking a $500bn financing arrangement from a consortium of leading Wall Street names to buildout their AI infrastructure.
 

The full Quarterly Review is available here. 

October 2026

Important Information

The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.