September 2026 highlights
Season of the Witch: September has a well-earned reputation as the worst seasonal month for equity market returns, particularly in mid-term years. But underneath the headline averages is a more nuanced story. Initial conditions matter, and markets in uptrends have a habit of breaking that negative trend. While it’s still worth treading lightly, underlying trends matter far more than the month on the calendar.
Hurdy Gurdy Man: The bears have a far stronger argument on their hands when looking at rates than seasonality. While the headlines focus on the level of rates, the rate of change matters far more for risk assets in the short run, and with the latest thrust higher in long end rates we’ve now crossed firmly into territory where rates translate into equity market indigestion. But with markets already discounting nearly 100bps of tightening over the next year, we may finally have endured enough pain at the long end to see yields stabilize.
Colours: As is tradition, when no one knows why rates are selling off the market collectively throws any narrative at the wall to see what sticks. The latest such narrative gaining traction: AI debt issuance is crowding out sovereign bond markets. It’s a great story as everyone is focused on the increasing debt financing needs of the AI infrastructure buildout, but it’s little more than that. Net issuance is indeed running higher but scaled to the size of the marketable US Treasury market it’s hardly exploding higher. If AI is having an impact on rates it’s primarily via the strong nominal growth impulse the buildout is providing.
Catch the Wind: Yields don’t move in a vacuum. While technicals can certainly play a key role in short term overshoots as they appear to be doing today, fundamentals matter. Nominal growth drives nominal yields. To that end, while nominal growth has indeed accelerated over the past few quarters thanks to resilient real activity and firmer inflation, the nominal anchor in the economy, income growth, continues to soften, suggesting nominal growth is likely to moderate in the coming quarters, helping to cap nominal yields in the process.
Mellow Yellow: While we’re hearing renewed calls of 10Y yields pushing up to 6%, there’s nothing like a whiff of slower growth to spur a renewed bid into duration. And while growth continues to track firmly so far in Q3, underlying growth trends continue to point to a softening that is already starting to show through in the data as the US economic surprise index softens on the back of outright cooling in the data. Should that trend continue in the coming months as the Fed embarks on unwinding 2025’s insurance cuts, it wouldn’t be surprising to see growth concerns begin to float to the surface once more.
