Bonds set for bruising September; stocks fare better

As global bond yields soared in September, setting a potential record high for the US 10-year Treasury, investors were left to grapple with the implications for riskier assets. The surge in borrowing costs, fueled by deteriorating government finances, a flood of bond issuances, and surging inflation, has been a primary concern for financial markets since the onset of the US-Israeli conflict in Iran.

In stark contrast to bonds, stocks managed to maintain relative stability and even rallied in Asia, defying the bearish sentiment surrounding higher yields. MSCI's Asia-Pacific ex-Japan index edged up 0.2%, while Japan's Nikkei and South Korea's Kospi showed positive signs of recovery, each expected to end the month relatively unchanged and up 1.4% respectively. Meanwhile, Nasdaq and S&P 500 futures remained modestly bullish.

This divergence can be attributed to a combination of factors, including strong corporate earnings, a robust global economy, and a continued fascination with artificial intelligence. However, a notable aspect of this market resilience is the surprisingly strong performance of equity markets amidst the backdrop of rising bond yields.

According to Citi's head of Asia-Pacific trading strategy, Mohammed Apabhai, this reaction is particularly intriguing given that the surge in bond yields has been driven by the expectation of future monetary policy tightening.

While higher yields do increase financing costs for companies and could potentially weigh on growth, their impact on equities has not been as pronounced as anticipated. The market appears to be more focused on the positive aspects of economic growth and the transformative potential of AI-driven technologies. As such, the bond yield-driven rally in stocks demonstrates the complex and multifaceted nature of global financial markets during periods of economic uncertainty.