High and Rising Bond Yields Put Financial Markets to the Test

Despite high bond yields, equity markets have so far shown remarkable resilience. The technology sector has seen a reversal in trends: while the previously overheated semiconductor sector has recently lost ground, the battered software sector has staged a strong recovery.
The robust economic backdrop was also reflected in corporate bonds. Credit spreads on investment-grade and high-yield bonds remained tight despite the higher cost of borrowing.
In foreign exchange markets, the Japanese yen formed a volatile base following coordinated intervention. The Australian dollar gained against most major currencies. Over the past month, the Swiss franc weakened slightly against the euro while gaining modestly against the US dollar.
After a sharp pullback from its highs at the beginning of the year, gold has recently remained unfazed by high real yields, rising by more than 10% in August.

US growth remained solid. The latest estimate for third-quarter growth stood at 4.7% (Atlanta Fed GDPNow, as of September 3, 2026). As a result, expectations of a recession before the end of 2026 had largely faded. US core inflation for August and September was estimated at 2.4% and 2.3%, respectively. However, when only third-quarter data were annualised, core inflation came in at 1.9% (Cleveland Fed Inflation Nowcasting, as of September 4, 2026).

High and rising bond yields, alongside stable inflation expectations that remain slightly above target, have once again put the US Federal Reserve’s reaction function under the spotlight. Its chairman, Kevin Warsh, delivered a closely watched speech at Jackson Hole at the end of August on the principles and practice of monetary policy. Notably, unlike his predecessors and many market participants, he saw no fundamental contradiction between solid growth with full employment and lower inflation. He also emphasised the importance of money created by the central bank and the financial system for financial conditions and prices.
Warsh had previously pointed out that the bond market was doing part of the work of monetary tightening: following the latest rate cuts, long-term yields have risen significantly, thereby tightening financial conditions. An increase in short-term policy rates could even partly reverse this effect if long-term yields were to fall in response. For the economy, however, it is precisely these longer-term financing costs that matter more.

The market priced in a 59% probability of a 0.25% rate increase by the US Fed on September 16 (CME FedWatch Tool, as of September 5, 2026). We, by contrast, do not expect a rate hike. Based on Warsh’s previous statements and our assessment of the macroeconomic environment, we see insufficient grounds for an immediate move. Solid economic growth is accompanied by easing core inflation, while the significant rise in long-term yields has already tightened financial conditions materially.

A more restrictive monetary policy stance was emerging among other major central banks. Markets expected rate increases at the forthcoming meetings of the ECB, the Bank of Japan and the Reserve Bank of Australia.

For the coming months, we expect a macroeconomic Goldilocks scenario of solid economic growth and declining inflation. Productivity gains and base effects should contribute to this trend.
That said, one thing remains certain: we do not know – nobody does – what the future holds or which events may unfold. This makes a disciplined investment process and robust portfolio construction all the more important.

September has historically been one of the weakest months for equity markets. The US midterm elections in early November and the geopolitical flashpoints that continue to simmer could also trigger higher volatility. We nevertheless view larger setbacks as selective buying opportunities in equities rather than the beginning of a bear market. For now, we remain cautiously optimistic.
Government bond yields have reached attractive levels and should provide some protection if the economic outlook deteriorates. We are particularly constructive on inflation-linked bonds, where relatively high real yields can currently be locked in.
In credit, we avoid the high-yield segment and favour investment-grade bonds. The massive borrowing by top-tier hyperscalers is likely to be the first source of a potential crowding-out effect in this segment.
In the spirit of John Pierpont Morgan’s famous quote, “Gold is money. Everything else is credit,” we view gold primarily as a currency rather than a commodity. The yellow metal remains an important and stabilising component of portfolios.
In currencies, we would not be surprised to see a significant appreciation of the Japanese yen. In our view, its undervaluation relative to purchasing power parity has simply become too pronounced. The euro is likely to have a bias towards strength over the coming months, while the US dollar should tend to weaken. The Swiss franc should retain its status as a safe haven. In other words, the CHF is likely to edge lower as long as sentiment in financial markets remains favourable, but should appreciate if unexpected turbulence emerges.