THE ETERNAL SOVEREIGN

Tag: bond

  • 5 Reasons the Global Bull Market Is Still Going Strong

    Stock markets around the world continue to advance, but a series of central bank meetings in the coming weeks will put investors’ confidence to the test. At the same time, government bond yields are climbing across major economies. The key question is whether these higher yields are signaling stronger-than-expected economic growth, renewed inflation pressures, or growing concerns over fiscal debt.

    Equity markets are clearly pricing in continued economic expansion—and we share that view. Here’s why:

    Global Stock Markets

    The ratio between US equities and developed-market equities outside the US has moved sideways since early 2025, following a 15-year period of sustained gains. Over that period, both markets have delivered comparable returns.

    The US-to-emerging-market MSCI ratio has started moving higher again in recent weeks, although both remain below their 2024 peaks. Emerging markets were the main driver of global equity gains during the first half of the year before surrendering some of those advances in July. The recent shift suggests the performance gap may once again be narrowing.

    September is still in its early stages, but Brazil currently leads the country ETF rankings, gaining 5.1% month-to-date in US dollar terms. South Korea follows with a 4.4% gain, while Taiwan is up 3.8%. The US ranks near the bottom, with an increase of just 0.4%. The latest week therefore provided another boost for the global-investment theme.

    The ACWX and PBUS ETFs have moved closely together since Liberation Day last year. The fact that the global bull market has remained relatively balanced between US and international equities for more than a year is particularly notable.

    Performance across major international equity ETFs has been mixed since early 2025, when global markets began outperforming—or at least keeping pace with—the US. Japan and emerging markets have gained ground relative to US equities, while the Eurozone has lost momentum and the UK continues to underperform.

    Earnings and Valuations

    US equities currently trade at a forward P/E ratio of around 19.8, compared with 13.1 for the All Country World ex-US index. Both valuations have declined this year because corporate earnings have grown faster than share prices.

    Forward earnings expectations for the All Country World ex-US index continue to rise, with analysts increasing their estimates for 2025, 2026, and 2027. The projected jump from 2026 to 2027 is particularly strong, while forward earnings remain on an upward trajectory and continue to reach new highs.

    Developed markets outside the US are showing a similar earnings trend.

    Emerging markets have posted the strongest earnings outlook among the three major groups. South Korea and Taiwan are responsible for much of this momentum. Consensus estimates for 2026 earnings growth have climbed to 333.9% for South Korea and 56.9% for Taiwan.

    Global Bonds

    Bond yields are moving higher across most major economies. The UK’s 10-year government bond yield stands at 5.14%, while the US 10-year yield is 4.78%. France is at 4.19%, Germany at 3.34%, and Japan at 2.91%.

    China remains the notable exception. Its 10-year government bond yield is only 1.68% and continues to trend lower.

    For much of the period following the 2008 Global Financial Crisis, government bond yields remained significantly below nominal GDP growth. That environment has now changed. Bond yields have moved closer to nominal GDP growth across major economies and have already surpassed it in countries such as France and the UK.

    Currencies

    The US dollar continues to hold relatively firm. The DXY is around 99.2 and remains within the long-term upward channel that has contained the index since 2011. Concerns about de-dollarization tend to resurface whenever the dollar weakens, but so far, the DXY has provided little evidence of a structural shift away from the greenback.

    The Japanese yen has strengthened significantly over the past week as traders have reassessed both the timing and potential pace of further monetary tightening in Japan.

    The South Korean won has also reached its strongest level in more than a year. Korean exporters have been converting dollar revenues into won amid a substantial trade surplus, while proceeds from a major US listing have provided an additional source of foreign-currency inflows.

    Commodities

    Commodity markets are increasingly becoming a source of inflationary pressure. Rising grain prices could begin feeding into food inflation across economies around the world.

    Diesel prices are another area to watch, given their importance to industrial activity and transportation. Spot diesel prices have risen sharply in recent weeks, potentially adding further cost pressures for businesses and consumers.

  • US Treasury yields reverse course as investors rush to safety

    Early on, some questionable US labor market data set the tone, but the real catalyst was the shift to a risk-off mood. Day two is often decisive. We also cover updates from the ECB and BoE—no policy changes, but plenty of developments.

    A growing sense of decay fuels demand for Treasuries

    Markets reacted sharply to weaker US labor data on Thursday—arguably an overreaction. Challenger job cuts came in elevated, and headlines noting the highest January reading since 2009 quickly raised alarm. However, a higher figure was recorded as recently as October 2025, and the series itself is notoriously volatile.

    A move lower in yields was the appropriate response, but the magnitude was reinforced by subsequent JOLTS data, which showed job openings falling more than expected. Openings remain sizeable at around 6.5 million, though down from 7.2 million. Initial jobless claims also edged higher, but the increase was modest and levels remain low in a broader historical context.

    Broader market dynamics added fuel to the move. A pronounced risk-off backdrop—particularly concerns surrounding private credit—typically channels demand into Treasuries. Technical factors also played a role, with key thresholds giving way: the 10-year yield broke below 4.2%, while the 2-year slipped under 3.45%. While not extreme relative to recent months, the move was nevertheless notable. Hard to fight the move, particularly if the risk-off reassessment proves durable.

    ECB meeting takes a back seat to global risk sentiment

    A dovish tilt from the Bank of England, softer US labor signals, and persistent equity-market jitters have had a greater influence on markets than the ECB, with the 2s10s Bund curve modestly reflattening in a bullish move—still comfortably within recent ranges. The VIX remains elevated, indicating ongoing caution around potential equity volatility. While there has been no broad-based equity sell-off, investors are becoming more discerning about the sustainability of AI-driven business models.

    ECB President Lagarde appeared to downplay the role of the exchange rate in the policy outlook, though our economists see it as a lingering vulnerability in the ECB’s “good place” narrative. In the near term, tail risks remain skewed toward further easing, even as the threshold for a rate cut stays high. Markets are currently pricing roughly a 25% chance of a cut later this year, which we view as reasonable. This pricing keeps the front end of the euro curve well anchored, implying that any further deterioration in global risk sentiment—stemming from outside the euro area—would likely continue to flatten the curve. That said, a concurrent strengthening of the euro would complicate the curve dynamics.

    A dovish BoE fails to outweigh mounting political risks

    Markets reacted far more strongly to the Bank of England meeting than to the ECB, with a March rate cut rapidly becoming the base-case scenario. The BoE’s relatively sparse inter-meeting communication means that policy surprises tend to generate outsized moves, and this meeting delivered just that. The 2-year swap rate dropped around 7bp as the outcome proved more dovish than markets had anticipated. We are broadly aligned with the revised pricing and see considerable scope for easing as inflation continues to soften. Governor Bailey appeared to endorse this view, later remarking that current market pricing for a March cut was “not a bad place to be.”

    Attention now shifts to the long end of the curve, where political risks may continue to exert upward pressure on 30-year gilt yields. Unlike the front end, the 30-year yield actually rose by roughly 3bp on Thursday despite the BoE’s dovish pivot. Political uncertainty—particularly around Starmer’s position as prime minister—adds to doubts over the future fiscal trajectory. Ahead of November’s budget, we had estimated the 10-year gilt risk premium at around 25bp, underscoring investor sensitivity to the UK’s fiscal outlook. Against this backdrop, we see limited scope for 10-year GBP rates to move meaningfully lower in the near term.

    Friday: Key Events and Market Outlook

    Softer US labor indicators weighed on risk sentiment on Thursday. While Friday does not bring the official jobs report, attention will turn to the preliminary University of Michigan consumer sentiment index. Consensus expectations point to a weaker reading, but any sharper-than-anticipated deterioration would likely amplify existing market unease. Consumer credit data, also due on Friday, will be another point of focus.

    In the euro area, the ECB will publish its Survey of Professional Forecasters. Following the ECB meeting, markets will also listen closely to remarks from ECB officials, with Kocher and Cipollone scheduled to speak. Elsewhere, BoE Chief Economist Huw Pill is also on the agenda.

    On the supply side, government issuance is limited, with the only primary market activity being a €0.5bn Belgian ORI auction.

    Sources: Padhraic Garvey

  • Rising Japanese yields pose growing risks for global bond markets

    This may be the single most important chart in global bond markets right now.

    Japanese investors rank among the world’s largest exporters of capital. Collectively, they hold a substantial share of European sovereign debt and U.S. Treasuries, with ownership running into the trillions of dollars. However, the economics underpinning these investments may soon begin to break down.

    If that happens, Japan could see a meaningful repatriation of capital—away from foreign bond markets and back into domestic fixed-income assets.

    The consequences for both global bond yields and currency markets would be significant. To understand why, it helps to look at the basic math.

    The chart compares the 30-year Japanese government bond yield (blue) with the hedged yield on the 30-year U.S. Treasury (orange), adjusted for USD/JPY currency-hedging costs. The scenario assumes the Bank of Japan gradually lifts policy rates toward 1.75%, while the Federal Reserve cuts rates to around 3% over time.

    Note how the two yields are now converging.

    At current levels, Japanese investors gain little—if any—advantage from purchasing 30-year U.S. Treasuries on a currency-hedged basis versus simply holding long-dated Japanese government bonds at home. The picture becomes even more compelling when considering a longer-standing behavior.

    For years, Japanese investors have also allocated heavily to foreign bonds without hedging currency risk—and for a clear reason.

    The prevailing assumption was that the yen would continue to depreciate, allowing Japanese investors to benefit not only from higher foreign yields but also from favorable FX moves.

    • Earn higher yields in foreign bond markets
    • Gain additional returns from yen depreciation

    With the United States signaling its willingness to prevent further yen weakness, and Japanese bond yields having risen sharply, this long-standing equation no longer holds.

    Should Japanese investors begin to scale back capital outflows to overseas bond markets, the ripple effects across global bond yields and currency markets could be substantial.

    Sources: Alfonso Peccatiello