Oil, inflation and France all competed for investors’ attention this week, as the bond market remained firmly at the centre of the story. Investors are being forced to confront an uncomfortable reality about the path for interest rates.
Read this article to understand:
- Why bond yields continued to surge
- The outlook for US interest rates after the latest inflation data
- Why US equities have been outperforming international peers
The week began with investors focused on the Middle East. Hopes the US and Iran might find a path towards reopening the Strait of Hormuz faded as both sides’ positions hardened. Oil prices rose, with Brent crude briefly pushing above $107 per barrel. With prices having risen more than 40 per cent since late June, energy prices could feed into inflation well into 2027.
That backdrop continued to weigh on bond markets. US Treasury yields climbed to levels not seen since the early 2000s, with the ten-year yield touching 5.34 per cent during the week before easing back. Long-dated borrowing costs moved even higher, with the 30-year Treasury yield rising above 5.6 per cent. Higher bond yields act like gravity on financial markets. They increase borrowing costs, raise the hurdle rate for investment and create stronger competition for equities.
Higher bond yields act like gravity on financial markets
Yet the most interesting development came from US inflation data itself. The Personal Consumption Expenditures index, the Federal Reserve’s preferred measure, showed core annual inflation unchanged at 3.4 per cent in August. That was lower than expected, after July’s figure was revised down from 3.7 per cent. In normal circumstances, this would have been the week’s dominant story. It suggested underlying inflation was cooling in the US and pointed to a less pressing need for further interest rate increases. Although expectations for an October Federal Reserve rate rise fell sharply as a result, the data failed to alleviate pressure on government bond markets.
France was at the centre of the sell-off in government bonds, with French government borrowing costs rising sharply relative to German rates, pushing the yield differential between the two countries to its widest level since the euro zone debt crisis.
Shares in French banks sold off heavily, with Société Générale stock losing five per cent in a single day, while the broader European banking sector suffered its weakest session since March.1 These moves reflected growing concerns about government finances and the sustainability of higher borrowing costs across parts of Europe.
The US economy continues to thrive, despite expectations among some investors of a sharp slowdown. Jobless claims fell to 197,000, a ten-week low, while business activity remained consistent with an economy that is still expanding. That resilience has helped equities hold up far better than many would have expected given the rise in bond yields.
Investors are no longer asking whether inflation will fall, but rather what happens if interest rates stay relatively high for years
Although the gains have been concentrated in shares of companies expected to benefit from artificial intelligence, the headline numbers remain impressive. Global equities ended the third quarter up more than one per cent and have delivered gains of almost 14 per cent so far this year.
In many ways, that was the real story of the week. Inflation news improved. Growth remained solid. Yet markets became more uneasy. Investors are no longer asking whether inflation will fall, but rather what happens if interest rates stay relatively high for years rather than months. Europe is already showing signs of strain. The US, for now, continues to power through. How long that divergence lasts may become one of the defining questions for markets in the months ahead.2
Past performance is not a reliable indicator of future results.
References
- The company mentioned is for illustrative purposes only and does not constitute an investment recommendation.
- Source of all the data for this article: Aviva Investors and Bloomberg. Data as of 2 October 2026.
