Stocks fare better as bonds face rough September

In recent weeks, global bonds have experienced a challenging month, with yields in Japan nearing multi-decade highs and 10-year government bond yields in Germany and France reaching 17-year and 18-year peaks, respectively. This dismal performance in the bond market was further exacerbated by a multitude of factors, including deteriorating government finances, a surplus of bond issuances, and escalating inflation, all of which were compounded by the ongoing US-Israeli war on Iran, which has contributed to elevated energy costs.

Despite these unfavorable conditions for bonds, stocks managed to fared better, remaining relatively unscathed by the surge in bond yields. The resilience of the equity market can largely be attributed to robust corporate earnings, a thriving global economy, and continued enthusiasm surrounding artificial intelligence.

Investors have been closely scrutinizing the relationship between bond yields and stock prices, as sovereign yields serve as a fundamental reference point for investing in riskier stocks and a benchmark for mortgages and corporate borrowing. Consequently, the rise in borrowing costs has been a focal point for market participants.

Notably, the benchmark 10-year US Treasury yield reached its highest point since 2007 at 5.2383% in Asia, and was projected to rise by nearly 50 basis points this month, marking the largest increase in about two years. Bond yields move inversely to prices, and the 2-year yield experienced a slight decline to 4.8889% after New York Federal Reserve president John Williams raised concerns about earlier policy tightening, although yields remain more than 50 basis points higher than the previous month.