Bonds set for bruising September but stocks little fazed

Global bond markets experienced their worst monthly performance in years, driven by deteriorating government finances, a surplus of issuances and rising inflation amid the ongoing US-Israeli conflict with Iran, which has pushed energy costs higher. Stocks, particularly in Asia, managed to stay relatively unaffected by the surge in bond yields.

Rising borrowing costs have become a focal point for investors, as sovereign yields serve as an anchor for global markets, a reference point for investing in riskier stocks and a benchmark for mortgages and corporate borrowing. US 10-year Treasury yields hovered near a two-decade high of 5.23% in Asia, with a projected 50 basis point rise this month, the largest increase in about two years.

Japan's 10-year government bond was set for a 42 basis point surge this quarter, while Germany and France witnessed 17-year and 18-year peaks in 10-year bond yields this week. Despite the yield surge, equity markets in Asia largely defied expectations. MSCI's Asia-Pacific index excluding Japan increased by 0.4%, with Japan's Nikkei and South Korea's Kospi on track for monthly gains.

Nasdaq and S&P 500 futures edged higher, while Euro Stoxx 50 and German DAX futures rose as well. Corporate earnings, a robust global economy and the hype surrounding artificial intelligence were cited as key factors behind the resilience in equity markets. However, US equities showed limited reaction outside the tech sector, with many macro funds and institutional investors questioning the potential for even higher bond yields and their impact on capital spending by tech giants.

In Chinese markets, the CSI 300 index rose slightly, but was on track for a 13% quarterly slump, the largest since the height of Covid-19 lockdowns. The Shanghai Composite index also posted a 6.2% quarterly decline, its biggest in four years. Meanwhile, the US dollar gained momentum, driven by rising yields, leading the euro to a 16-month low and the yen poised for a monthly gain.