AFS Markets Blog: Midday 16/10/2026

• Meanwhile in markets, the path towards lower bond yields is rather narrow.  Euphemisms aside: it would require a Deus Ex Machina or two;

• Bund yields are down 3-5bps across the curve for the week while US Treasuries outperformed marginally with declines of 3-7bps across the curve. 10y and 30y Bund and UST yields are now down a good 20bps from their autumn highs. Nervous ECB-speakers and Fed-speakers, taken aback by the speed of the increase in long end (real) yields, have jawboned them lower. Granted, central bank rate hike pricing, especially ECB pricing, had become somewhat excessive. Furthermore, bond yields have correlated strongly with AI equity prices in the past four weeks. Stress in the weaker corners of AI space – CDS spreads and bond yields of tech companies CoreWeave and Oracle soaring – have dragged down bond yields;

• Still, high energy prices are providing a firm bottom for bond yields. That brings us to one possible driver of lower bond yields: energy prices easing. Or deals in Ukraine and Iran. Regarding the former: President Trump’s skinny diesel deal with Russia is the proverbial drop in the ocean. Especially when Ukraine continues its strikes on Russian energy infrastructure. Regarding the latter, Iran has stepped up its attacks on shipping in the Strait of Hormuz. With some success as the effects of US jawboning on oil prices – boasts about a partial normalization of flows through the Strait of Hormuz – have faded. Brent crude futures have become stubbornly stuck north of $100 a barrel. For us Europeans the situation is particularly painful. There’s no stopping the rally in natural gas prices. Benchmark Dutch natgas futures are up seven percent for the week and approaching the 90 euros per MWh handle. That would be the highest level since the 2022 energy crisis;

• I am certainly not holding my breath for US President Trump conjuring peace deals in Ukraine or with Iran into existence before the midterm elections, which the Republicans are bound to lose according to the pollsters. Or for the stalemates in the Iran and Ukraine war to end for that matter, and one side or the other gaining the upper the hand. I am not waiting for miracles;

• The CoreWeave/Oracle saga this week has shown that bond yields are very sensitive to the health of the AI boom/bubble. However, it’s hard to find stress outside those two names. Yes, plenty of AI stocks are down strongly this week. The twenty stocks on our screener are down seven percent on average for the week. But we’ve been here before: stiff losses – eventually followed by a recovery – in AI stocks. In the meantime, the effects on the real economy of AI are – dare I say – blossoming;

• Take this morning’s quarterly earnings report of French manufacturing firm Schneider Electric. Schneider, which provides cooling equipment and other electronic parts for data centers, spoke of voracious demand driven by the AI boom. Data center demand growth was in the triple digits last quarter. With a full backlog, that should translate to strong revenue growth in 2027 and 2028;

• We heard the same story from ASML in its quarterly earnings release last Wednesday. The Dutch tech bellwether says it won’t be able to satisfy voracious demand for its high-end lithography machines in 2027 and 2028. The takeaway: the real economy is set to enjoy the fruits of the investment boom for another two years;

• I think for AI to drag bond yields lower, we would need to see a sudden stop in data center investment by AI labs. And contagion from the weaker names in AI space to the stronger names in credit markets. That hasn’t happened. And it’s a bit like waiting for a black swan to arrive anyway;

• Concluding with some market commentary, European stocks are up moderately for the day, with the Stoxx 50 up half a percent for the week. S&P 500 futures are up half a percent and we should be able to end the week flat. The broad dollar is down modestly as Fed rate hike bets for the October FOMC have deflated to negligible levels. Theoretically, the Fed could still hike this month – Chairman Warsh refused to give any guidance when he spoke overnight – it’s a long shot. Key Fed-speakers have signaled a flat out hold, perhaps mindful of the midterm elections;

• The French fiscal situation has quieted down even though the 2027 austerity budged isn’t closer to passing. OAT yields have outperformed Bunds by several bps this week. Notably, the CAC is up 1.7% for the week and no longer in correction territory;

• Looking ahead, today’s calendar is empty and next week’s calendar is relatively uneventful. Key events include next Friday’s October PMIs and Moody’s review of France’s rating.

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