AFS Markets Blog: Midday 01/09/2026

• Meanwhile in markets, the bond market vigilantes are back. And even equities have started to take notice of the relentless rise in sovereign yields

• Not a day goes by when fiscal sinning isn’t splattered on the front page of this or that financial newspaper (or newswire). If you’re in markets and you don’t know from memory what the deficit is in this or that country, you better start paying attention. At current interest rates, in the US and everywhere in Europe except in the South (yes, the South), fiscal debt is on a completely unsustainable trajectory. Interest outlays (both absolute and as a share of fiscal spending) and debt ratios are rising in tandem;

• Some politicians have started to notice the market turbulence, but not (yet) in a serious way. In France, the country that has been hit hardest in our universe by the bond market tantrum except for Japan, the deficit was a major topic at last week’s presidential election debate. Marine Le Pen, the far right leader and most likely candidate to succeed President Macron next year, talked about cutting the deficit while at the same time sticking by her fiscally unsustainable social promises, such as lowering the retiring age 62. As someone who experienced the Eurozone crisis firsthand, I can tell you that Le Pen’s having her cake and eat it moment means that she’s still far away from the stage where she capitulates to market pressure and commits to austerity. Bottom line: we haven’t yet reached the stage where the market is putting the proverbial knife to the throat. If the bond vigilantes really exist, they must push yields much higher still;

• Turning to some market commentary, Bund and UST yields are up several bps across the curve around noon. Over the past five days, losses are stiff: more than 15bps across the curve. 10y and 30y Bund and UST yields (and Japanese Government Bond yields, French yields, the list goes on) are at their highest level in decades. Inflation-linked swap rates and breakevens have lagged the increases in nominal yields. Meaning that real yields have driven nominal yields higher. A truism if there ever was one;

• European equities are down, with the Stoxx 50 shedding 0.8% and S&P 500 futures down by a similar percentage. For the record: the Stoxx 50 is down 3.3% from the mid-August peak. The twenty stocks on our AI screener are stable in the sense that over the past five days, losses or gains have not exceeded five percent. While most stocks are down low to mid double-digit percentages from the highs of the year, the AI sell-off has calmed down;

• The Bessent trade (named after US Treasury Secretary Bessent) consisting of long the yen and the 30y UST, predictably isn’t doing great. USDJPY has reached the 160 handle – the intervention handle. Furthermore, at 5.27 the 30y yield has erased its Bessent jawboning induced declines;

• Energy future prices have extended their recent advance. Dutch natural gas futures have risen to 71.17 euros per MWh, the highest level since the outbreak of war. Brent crude futures at $92.28 a barrel are at their highest level in two weeks. Clearly, the resumption of – so far – low key tit-for-tat strikes between the US and Iran hasn’t truly unnerved punters but only ruffled some feathers;

• Even higher natural gas prices put our ECB overlords in a quandary. They add to inflation, of course. But at the same time, Euro Area growth, which ECB-speakers now judge to be accelerating, is at risk of being dragged lower by the ongoing rally in natural gas futures prices. Regardless, I am more inclined to up my forecast for ECB interest rates to another quarter point hike in December than the hold that I have now penciled in;

• Looking ahead, we have key US economic data on tap: US ISM services PMI and job openings. The focus for me this week is Fed Governor Waller’s speech on Thursday. Waller leads the contingent that was against a hike last month. With Chairman Warsh having dismissed the soft June and July CPI readings as noise (the crutch on which the doves were standing), Waller and the doves now face an uphill battle to prevent a hike this month. A battle which I believe they will lose.

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