Week ended September 25, 2026: bond yields continue to increase

The main focus of investors last week was ongoing volatility in global bond markets, with yields continuing to march higher across the globe.

US economic activity is solid, validating the Fed’s approach

There is no shortage of villains to blame for the sell-off in government bonds. The midweek catalyst that sent US Treasuries into a tailspin was the release of September flash PMI data for the US manufacturing and services sectors. The figures showed a sharp improvement in activity from August and came in well above economists’ expectations.

Robust US growth is another reason for bond yields to rise, alongside a host of other pressures. The PMI release also validates the FOMC’s decision last week to raise the federal funds rate by 25 basis points, with markets now pricing in at least three further 25-basis-point increases over the next 12 months. With inflation still elevated and the economy maintaining solid momentum, the Fed has more room to address the more troublesome side of its dual mandate: returning inflation to target.

Americans getting hit in the wallet

Two things hit Americans—especially middle-class Americans—right in the wallet: high gasoline prices and escalating mortgage rates. The former spares few Americans, who love their cars.

Gasoline prices:  The national average price of a gallon of gasoline in the US at the end of the week was $4.49/gallon, versus $3.16/gallon one year ago, according to AAA.  The high cost of diesel fuel has indirect effects that reverberate through many parts of the US economy even more broadly.  Diesel fuel closed the week at $6.50/gallon, versus $3.69/gallon one year ago.  This is an all-time record high for diesel fuel.  The graph below depicts average gasoline price per gallon by state.

No wonder Republican candidates for Congress are shaking in their boots – Americans are questioning the cost of the war with Iran that is dragging on and on, costing the US more and more in terms of munitions and elevated oil prices. 

Mortgage rates: The second factor that is increasingly affecting homebuyers (and homeowners) in the US is higher mortgage rates.  The average US 30-year fixed mortgage rate rose above 7% last week for the first time since the second half of 2023. Rates remain close to their highest levels since the early 2000s.

I’m no real estate expert, but these high mortgage rates – correlated with soaring US Treasury bond yields – are likely to weigh on demand for new and existing homes in the US.  Homeowners who locked in mortgages at roughly half today’s rates—or even less—have little financial incentive to surrender those loans when moving home. That “lock-in” effect constrains the supply of existing homes for sale.

Economic data strong also in Europe, though less so in the UK and Japan

PMI data in Europe also came in strong, although growth was weaker vis-à-vis August in both Japan and the UK.  Keep in mind also that most of the developed world continues to face inflationary pressures, and this will likely mean that central banks have little choice but to remain hawkish in the months ahead. 

The ECB has made it crystal clear that it has no qualms about further tightening if inflation remains elevated, and high oil prices persist.  The Bank of Japan looks set to pause (as their last increase was a “dovish increase”), but has signalled it will resume tightening following a short pause probably in the new year.  The Bank of England is providing a lot of blustery rhetoric since inflation is elevated in the UK, but with the autumn budget just around the corner, it remains to be seen how BoE Governor Andrew Bailey will navigate the slippery slope of slow economic growth and high inflation.  

Clearly, bond vigilantes have considerable “voting power” in the UK, while bond investors also appear influential in some of the more fiscally stressed countries in the eurozone, including France.

Bonds tank, equities (somehow) register gains 

Global bonds, including US Treasuries, got hammered last week.  US Treasury yields were higher across the curve, with total return bond investors continuing to chalk up losses in 2026.  I will repeat what I often say in my blog – duration is not the place to be at the moment. 

Despite skyrocketing bond yields and a host of other macroeconomic concerns, global stocks somehow managed to mostly keep their heads above water last week, with US, European and Japanese stocks all recording gains.  Each week that passes becomes more surprising than the last one for me, as I still struggle to understand why equities have remained so resilient.  Earnings have a lot to do with it, but expectations will be very high going into the upcoming third quarter reporting season.  I suppose one could reason that high inflation is pushing nominal revenues and earnings higher for companies with pricing power, and at least cosmetically, this contributes to the earnings trends we are seeing. 

The tables at the end contain updated levels for the indices and assets tracked by EMC.

My two cents on my portfolio?

AI continues to oscillate in investors’ minds between a transformative productivity driver and an existential risk. Meanwhile, the US–Iran conflict continues in fits and starts, driving oil prices up and down with no credible end point in sight. The approaching midterm elections add another source of uncertainty—one that markets will struggle to price and that could intensify volatility in the weeks ahead.

I remain cautious, perhaps overly so. This does not change my portfolio construction, but it does make me increasingly uneasy. A correction will come eventually; the difficult question is timing.

Markets Tables

_________________

**** Follow E-MorningCoffee on BlueSky, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****