View from the markets: Tightening again

Higher inflation risks, rising real yields and weak fiscal credibility should keep long-term bond markets under pressure even as equities continue to benefit from AI-driven earnings growth.

• The ECB raised its key policy rates by 25 basis points, bringing the deposit rate to 2.5%, while markets priced at least one further Fed hike, another ECB hike and nearly two Bank of England hikes.
• Oil prices moved back above $100 per barrel, and inflation swap rates have risen since August, reducing confidence that inflation will soon return to central-bank targets.
• The ICE Global Aggregate Bond Index returned -0.9% month to date as of 10 September, -1.3% in the third quarter and -0.6% in 2026, while US and European high-yield indices were each slightly above 2.0% for the year.
• Convertible bonds returned 14% in 2026, and the MSCI World gained around 62% since the end of 2023 versus about 4% for global aggregate bonds, reflecting strong corporate earnings and enthusiasm for artificial intelligence.
• US 10-year real yields have risen above 2.5%, and the author argues that US 10-year government bond yields should approach 5% because nominal growth, inflation risks and higher real yields have restored their historical relationship.

Takeaway: Investors should favour newly issued bonds with coupons above 5% over older low-coupon long-duration debt, while remaining cautious on fixed income until monetary and fiscal policy credibility improves; the author still sees equities outperforming because of the AI narrative, although geopolitical and political risks could alter that outcome.