Bonds post worst month in years; stocks decline for September and oil gains

Global bond markets concluded their worst monthly performance in years on Wednesday, with the 10-year US Treasury yield surging and marking the largest monthly increase since 2022. The S&P 500 experienced a decline in September, and European equity markets suffered their first monthly drop in six years. For the quarter, 10-year US yields reached their biggest rise since 2009, while France's 10-year bond yield saw its biggest jump in nearly four decades.

The surge in bond yields was driven by soaring energy costs fueling inflation fears and the AI boom boosting economic growth, leaving investors to position for a period of higher interest rates. Higher rates negatively impact stocks, as they increase borrowing costs for businesses and consumers. Initial reactions to the bond news saw stocks rise, and two-year US bond yields fall due to reduced expectations of the Federal Reserve's interest rate hike next month.

The quarterly GDP data was revised higher to a 2.2% annualized rate, primarily due to strong consumer spending and investments supporting AI infrastructure development. The Fed raised interest rates for the first time since 2023 to combat inflation. The market had priced in a roughly 63% chance that the Fed would keep rates steady next month, but this rose to 55% following the US inflation release.

Inflation rates rose sharply in five German states and France's harmonised inflation rate increased while Italy's jumped. The spread between French and German 10-year borrowing costs reached its highest level since 2012. US yields rose by 53 basis points, their largest monthly increase since September 2022, and 30-year bond yields climbed about 39 basis points.

Global stock indices were mostly lower on the day, with the Dow Jones Industrial Average falling 0.86%, the S&P 500 slipping 0.25%, and the Nasdaq Composite gaining 0.24%. Despite the month's decline, the S&P 500 recorded its second consecutive quarterly gain. Global stock indices, including MSCI and the STOXX 600, also registered slight declines.

Oil prices rose by approximately $1 per barrel on the day and saw significant monthly gains, driven by stalled US-Iran peace talks and tightening US fuel markets. Brent November futures settled at $103.50 a barrel, while WTI crude increased by 1.2%. The US dollar remained relatively stable against major currencies following the US inflation data, but strengthened over the month against some currencies. Gold prices fell by 0.64% to $4,154.17 an ounce, also down for the month.