AFS Markets Blog: Midday 31/08/2026

• Meanwhile in markets, US Treasuries yields have moved off Friday’s post-Jackson Hole symposium highs. The 2-year UST yield is down 3bps from Friday’s close, while the 10-year is down a more contained 1bp;

• Nevertheless, Fed Chair Kevin Warsh’s hawkish performance has left its mark: at 3.41 percent the 2-year yield remains 7bps above its pre-speech level. Fed funds futures continue to price in 16bps of hikes for the September FOMC. While I see the winds blowing towards a September hike a soft August CPI reading – due on 11 September – could once again give a majority on the FOMC cover to hold rates, much like we saw in July;

• In our neck of the woods, Bund yields are holding near Friday’s close. The 10-year French OAT-Bund spread remains steady at 85 bps – unchanged since last Tuesday despite reports that the French Socialist Party, crucial to passing previous budgets for the minority government, may withhold support for the next budget ahead of the 2027 elections. We will continue to monitor this closely as 2027 budget negotiations begin in late September. Notably, the French OAT-Bund spread now sits 3bps wider than the Italian-Bund spread. This is despite France having a composite credit rating of roughly A+ compared to Italy’s which is approximately BBB+;

• Shifting to equities, the Stoxx 50 is down a quarter of a percent today, while losses in S&P 500 futures are more contained. Given that it has now been a month since our AI boom benchmarks hit their recent lows, I wanted to take a look at the state of AI. Our own AI index – which contains major hyperscalers and chip producers – still sits on the edge of correction territory, roughly 10 percent below its June highs. Nevertheless, it was down over 22 percent at its peak decline at the end of July and remains up 30 percent in 2026. South Korea’s Kospi index – another benchmark for the state of the AI boom/bubble – has held near a 60 percent YTD gain through late August, down from its 120 percent peak;

• Against this backdrop, the Silicon Data LLM Token Expenditure Index – which tracks the usage-weighted average price per million tokens across existing models – deserves attention. Down roughly 50 percent since June, the index has fallen to its December low – the lowest level since it was created;

• Tokens are the fundamental input/output units that AI labs monetize. While this drop does not directly reveal AI lab profitability or token volumes, it demonstrates a declining willingness to pay for extra compute capacity by end consumers. This trend can stem from a mix of users migrating to cheaper or open-source models (such as Chinese models Kimi K3 and DeepSeek), adopting more compute efficient models, or benefitting from direct price cuts. Ultimately, the lower willingness to pay for extra compute power raises critical questions about whether AI labs can generate enough profit to service the massive, debt-funded capex driving data center expansion;

• Credit markets reflect ongoing pressure on AI-related debt, as five-year USD-denominated bonds from hyperscalers building data centers have underperformed the broader USD IG corporate bond market in 2026. Yet this move falls short of a full-scale sell-off. Month-to-date, hyperscaler bonds have actually slightly outperformed as peak AI fears eased – at least according to equity market proxies;

• Turning to broader markets, Brent crude trades just below $91 a barrel, while European gas prices have crossed the €70/MWh mark this morning – hovering near their highest levels since the war began. In FX, the broad dollar is down marginally this morning but retains a half a percent gain over the past week;

• Looking ahead, this afternoon brings just a single release: preliminary German CPI for August. As September kicks off tomorrow, the calendar picks up with US ISM Manufacturing PMI and job openings data. In our neck of the woods, we get additional Eurozone CPI readings alongside some ECB-speak.

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