Please see the below article from Tatton Investment Management discussing resilient markets, rising bond yields and why bond weakness is not solely inflation-driven, received this morning – 07/09/2026.
Pretty good, considering
We ended last week with global stocks a little higher and bond prices a little lower, as government bond yields keep grinding up. Higher yields usually make investors nervous, but equity markets have stayed remarkably calm even with oil risk and rate rises thrown into the mix.
That calm persists despite hawkish central banks. Fed Chair Kevin Warsh, the ECB and the Bank of Japan all struck a hawkish tone at last week’s Jackson Hole conference, and markets now expect all three to hike at their next meetings. The BoE’s Andrew Bailey was the dovish exception, but markets still expect a UK hike before year-end. Their hawkishness is about credibility. They have managed inflation expectations by talking tough during the Strait of Hormuz crisis; they may now need to back talk with action, even if it hurts growth.
Stock markets seem relaxed regardless. Maybe that’s because investors think hikes are ‘one and done’, maybe it’s because AI spending looks unhindered by interest costs, or maybe they just think 5% bond yields will tempt buyers – as they have before.
Governments are less relaxed. The US Treasury’s debt buyback plan betrayed real unease about long yields, while in the UK, Andy Burnham’s spending comments have rattled gilts and reportedly cost £14bn of fiscal headroom. It’s a reminder of how the structurally imbalanced gilt market makes the UK more vulnerable to debt spirals than most.
Bond fears were allayed by corporate earnings growth last month, but the Q2 reporting season is now over. Meanwhile, US-Iran strikes have resumed, Brent Crude is edging back towards $100, and Russia’s war on Ukraine looks increasingly desperate. Higher energy costs are feeding into food prices too. Still, corporate profits remain unequivocally strong. For now, we think investors are taking the good with the bad. It’s a rocky path up, but markets aren’t out of breath yet.
August asset returns review
Given the backdrop of Middle East escalation and rising government bond yields, August was decent for investors. Global stocks climbed 1.9% in sterling terms, while bonds edged up 0.1%. July’s market anxieties about peak AI earnings growth faded, helped by strong Q2 earnings reports. US tech stocks led the way with a 3.2% gain, while EM equities climbed 2.6%, thanks to the presence of large chipmakers in the index. Japan’s market also gained 2.6%, buoyed by AI positivity and ongoing structural improvements. That’s impressive, considering the yen slid again through August, following July’s US-Japan intervention.
China underperformed yet again (-0.7%) and the UK (+0.2%) and Europe (+0.9%) were in the middle. British and European markets were helped by their tech stock underrepresentation in July, but it was a drag last month – despite solid corporate earnings growth.
US-Iran tensions pushed Brent Crude 2.1% higher and broader commodities gained 5.3%, led by gold and silver. Gold’s gain was more about the ‘yen-tervention’ liquidity injection than a safe haven move, evidenced by Bitcoin’s 24.6% rally. If the intervention was supposed to devalue the dollar, it hasn’t worked out that way.
It didn’t help bonds either, with yields rising to decade highs on a confluence of factors: AI capital demand, risk perceptions around long bonds and central bank policy. At Jackson Hole’s central banking symposium, Fed chair Warsh dialled up his hawkish rhetoric, as did the ECB. BoE Governor Bailey went against the grain with some dovish remarks, but markets moved to price in higher interest rates for all three banks. UK bonds underperformed, partly down to structural imbalances, but not helped by Andy Burnham’s spending comments. Bond index returns were still positive – as yields are now high enough to compensate for price volatility. Higher bond yields also didn’t hurt equities, which were focussed on corporate earnings.
Bonds aren’t all about inflation
Bond yields are at multi-decade highs and commentators put it down to oil shock inflation, or central banks’ response. The story makes sense: ‘risk free’ government yields are supposed to reflect long-term growth and inflation expectations, and higher oil prices are inflationary. But bonds themselves say different. It’s growth-sensitive real yields that have spiked – not inflation expectations.
Neither the growth nor inflation explanations match the data. Core inflation has behaved despite the oil shock, and growth is slowing mildly. Even the rate hike explanation is complicated. While higher rates raise short-term yields, they should theoretically decrease longer-term yields by compressing growth and inflation.
We suspect it’s more about high overall capital demand and bond risk perceptions. Vast AI borrowing eats up bond demand, exacerbated by historically high government debts. It’s not so much that governments are fiscally irresponsible, but that higher debt servicing costs could force a ‘doom loop’ of borrowing to cover borrowing.
Historically high long yields aren’t tempting buyers yet – perhaps because investors are scarred by recent bond price volatility (volatility-adjusted returns are weak compared to equities, even if yields are attractive). Many think bonds are a bargain; they just think they might be a bigger bargain tomorrow.
Higher yields should eventually tempt investors, but the timing depends on central banks. They are currently hawkish, which is a slightly odd response to what should be a short-term supply shock – but is probably more about re-establishing credibility after the post-pandemic ‘transitory’ debacle. If the oil crisis continues and central bankers are serious about 2% inflation, the only logical conclusion is to deliberately weaken growth. So far, they’ve managed inflation expectations with words, which now need to be backed by action.
Bond struggles are less about inflation itself and more about the response to it – from policymakers and the economy.
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Marcus Blenkinsop
7th September 2026