Markets weigh rising yields and AI exuberance

Higher yields and geopolitical, inflationary and AI-related pressures are driving a regime of persistent bond volatility that calls for active, globally diversified fixed-income portfolios.

• The US 10-year Treasury yield rose from around 4.7% in late August to above 5% on 15 September and briefly reached 5.34% on 1 October, its highest level since 2002.
• The MOVE bond-volatility index has risen significantly while decoupling from the VIX, even as equities remained resilient; the S&P 500 fell 0.3% and the STOXX Europe 600 1.1% over the past week.
• Brent crude has remained in the $95–$110 range, above its $87 average from June to August, adding inflation pressure and weighing particularly on European bonds; the G7 also agreed to release up to 100 million barrels from emergency reserves.
• Stronger US activity, inflation risks and heavy corporate issuance to finance AI investment have pushed long-term yields higher, while spreads in global credit have begun to widen as investors scrutinise AI-related capital expenditure and debt.
• France proposed €54 billion of fiscal consolidation on 1 October, targeting a 5.0% deficit-to-GDP ratio in 2027 after expecting 5.4% in 2026; despite wider spreads, France benefits from an 8–9-year average debt maturity, a diversified economy and foreign ownership of about 56% of its debt.

Takeaway: Bonds now offer yields not seen in decades, but volatility and credit dispersion are likely to remain high, favouring active global diversification and higher-quality bonds; French spreads may already have adjusted excessively, although political and fiscal uncertainty should persist until next year's elections.