AFS Markets Blog: Morning 16/09/2026

• Meanwhile in markets, bonds and equities are taking a breather ahead of this afternoon’s FOMC interest rate decision. US Treasury yields are down 1bp across the curve, allowing the 10-year yield to nip back just below the psychological 5.00 percent mark;

• The move in Treasuries puts only a minor dent in last week's sell-off – which saw US yields surge 7–22bps in a bear-flattening move. By comparison, Bunds fared better – rising ‘a mere’ 1–19bps. Actually, the movement in USTs is effectively a mirror image of that in French OATs, which also widened 7–22 bps across the curve;

• Scanning our bond dashboard, there is one clear outlier: Japan. JGBs have moved in a clear bear-steepening pattern, with yields rising 1–17bps over the past week. The Japanese long end is feeling the pressure of the country’s 240 percent debt-to-GDP burden. Fiscal concerns are mounting further following recent reports that Tokyo is planning to hike defense spending to 3.5 percent of GDP over the next decade or so – from just under 2 percent in 2026 – raising fears of accelerated debt issuance. Jawboning by Japanese officials isn't just used for the yen – Finance Minister Katayama was forced to step up yesterday to pledge that new bond issuance will be limited and the budget will have the aim of lowering the debt-to-GDP ratio. A tough ask if the reports on raising defense spending are true, but some calm has returned as the 30y JGB yield is down 3bps this morning;

• Looking ahead, the Bank of Japan is set to deliver its interest rate decision on Friday – with a 25bps hike fully priced into TONAR swaps. Year-end pricing reflects 47bps of tightening – implying a second rate hike at the December meeting. With US terminal rate expectations rising sharply, USDJPY has pushed back into the 155 handle – up over 200 pips in the past week and a half. A December follow-up hike is our baseline to keep the rate differential with the US from blowing out further. An October back-to-back hike is on the radar (6bps priced in), but unless the yen breaks down to new lows, I don't expect the BOJ to rush policy normalization. There are still plenty of dovish voices in the BOJ and inside the government that are afraid rushed hikes will cause the Japanese economy to slump back into the lost decade(s);

• Moving to some broader market commentary, Asian equities are up marginally this morning. S&P 500 futures are up a quarter of a percent this morning. Over in commodities, Brent crude is trading sideways at $108 a barrel, while European natural gas prices are up by just under two percent. In FX the broad dollar is holding near yesterday’s close, with EURUSD trading at 1.154 at pixel time;

• The focus of today will be the FOMC decision, but ahead of that we’ll be treated to some ECB-speak and the US retail sales print. The FOMC is widely expected to deliver a 25bps rate hike, leaving the focus on the hawkish tone of Chair Kevin Warsh's press conference – and whether he will give some non-forward forward guidance on the timing of future hikes. We are also looking at the vote split for potential dissenters, particularly given that a vocal and sizable dovish contingent – led by Governor Christopher Waller – actively pushed back against tightening before the latest CPI release.

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