AFS Markets Blog: Morning 15/09/2026

• Meanwhile in markets, higher bond yields are starting to become self-defeating. The recent bond market sell-off has flattened yield curves like a steamroller. Especially in the case of Bunds;

• I clock the 2y10y Bund spread at 25bps. Which, if we ignore intraday volatility, is the narrowest level since 2024. More importantly, the historical pattern of curve flattening and – ultimately – inversions are that they represent the final leg of the long-end sell-off. Simply put: higher long end (real) yields tighten financial conditions. Which, in turn, slows the economy. And when the economic weakness manifests, the long end rallies. But we’re not there yet even though I think the yield rises have become excessive;

• UST Treasury yield curve flattening in the 2y10y sector has been far less pronounced compared to Bunds. However, 5y30y UST curve flattening has been just as violent as the German counterpart. Regardless, and I sound like broken record here, 10y and 30y nominal yields have reached yet another multi-decade high overnight of 5.0245 and 5.388, respectively. 10y and 30y real yields also rose to their highest level in decades;

• For the record, pricing for tomorrow’s FOMC meeting now fully reflects a 25bps hike. Fed Chairman Warsh has no choice but to hike. If he doesn’t, watch long end UST yields rise to the moon;

• Losses for Asian equities and S&P 500 futures this morning are contained as they say. The Nikkei is down 0.2% while the Kospi shed less than a percent. Which for that index is basically unchanged. More importantly, yesterday’s tech hardware stock sell-off that was triggered by the ‘AI is becoming Skynet’ warnings that have become all the rage these days has already petered out;

• Brent crude and Dutch natural gas futures are loitering modestly below their recent highs, trading at $107.3 a barrel and 82.6 euros per MWh, respectively. Overnight, prices dipped a tad on President Trump claiming that he had brokered an energy truce between Ukraine and Russia. We’ll have to see about that one. So far, the Ukrainians have responded by saying close but no cigar. And the Kremlin refused to comment at the time of writing;

• ECB-speakers have given barely any pushback against the hawkish repricing of ESTRs. The terminal deposit rate is headed for 3.5 percent according to OIS. While I have yet to run the numbers again, and given my current forecast of a 2.75 percent deposit rate, current pricing is getting excessively hawkish;

• In FX the broad dollar is a tad stronger this morning. In the greater scheme of things, the recent energy price spike has been quite beneficial for the greenback. USDJPY is approaching the 155 handle, thus up almost two points from the intervention lows. Still, most yen gains are still intact – we were at 165 in late July;

• Keep an eye on the OAT Bund spread, which has widened to a post- Eurozone crisis high of 96bps. OAT Bund spread widening in parts reflects the ‘natural’ tendency of Bund spreads to widen on hawkish ECB repricing. But with OATs having underperformed Bonos and BTP, there’s a tell-tale sign of investors fretting over French political risk: the 2027 budget and the Presidential elections. In any case, we may have seen a safe have flow move in EURCHF yesterday;

• Looking ahead, US Treasury Secretary Bessent will testify before the House this afternoon. Where, pardon the pun, he can brag about being “the house”. But if we do not get more Bessent Wolf Warrior bravado and baiting “Bloomberg Bros” (yours truly included), that would be even more telling. It means he has lost his nerve;

• Key events later this week include tomorrow’s FOMC meeting and the now inevitable quarter point hike. What’s more, the Bank of Japan is also set to raise rates by a quarter at Friday’s meeting.

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