AFS Markets Blog: Morning11/08/2026

• Meanwhile in markets, it takes very little for bonds to sell off on a quiet news day. Since yesterday morning, UST yields are up 4-7bps across the curve, with roughly similar increases for Bund yields. As a result, 10y and 30y Bund and UST Treasury yields are awfully close to their recent highs;

• Granted, bond yields have mostly tracked Brent crude oil futures prices higher, with the latter up more than five percent compared to Friday’s close and trading at almost $88 a pop at pixel time. However, the move higher in yields/crude came on the back of relatively tame verbal sparring between Washington and Tehran overnight. In case of the latter, Iran reaffirmed its demand for war reparations. And in the case of the former, President Trump responded in kind and demanded reparations for Iran’s wartime strikes but also for its past sins. Ranging from killing its own protesting citizens to casualties in past conflicts for which Trump holds Tehran ultimately responsible. Bottom line, while a return to the Memorandum of Understanding seems like a long shot in the near term, I definitely prefer verbal warfare over actual warfare;

• But back to rising bond yields. I see no other logical explanation for the ongoing weakness in bonds than the market’s becoming increasingly nervous because of widespread fiscal incontinence (to quote SocGen’s legendary Albert Edwards). US Treasury Secretary Bessent’s hare-brained scheme to bailout the US Treasury market by helping the Japanese to prop up the yen is a case in point. Because what if the Bank of Japan is forced to tighten monetary policy abruptly? Shock tightening will likely result in an unwind of yen-funded carry trades into US assets, including Treasuries. And a corresponding rise in the yen and higher Japanese real yields. The latter in particular is a lethal outcome for a nation which is the biggest fiscal sinner in the developed world by a wide margin;

• As long as the AI boom/bubble rumbles on, I see no reprieve for bonds. The boom/bubble is boosting economic growth while at the same time tightening capital markets via massive debt issuance by the hyperscalers (the likes of Google, Meta, etc.). Markets that already have to absorb ever-increasing amounts of unsustainable government debt. A case in point: we had Nvidia overnight announcing a USD500 billion investment scheme with the likes of BlackRock and Goldman Sachs for AI compute. Highly likely involving a massive borrowing binge. You get the picture;

• I would feel comfortable with owning bonds for a while if the AI boom/bubble truly deflates, and when the economy heads south. While both are inevitable, timing is everything as they say. It’s definitely not my forte;

• Resuming with some overnight market commentary, Japanese government bond yields are flat this morning, as are Bank of Japan rate hike bets. When we look at Japanese real yields, the cause of yen weakness is all too obvious. With a nominal 2y JGB yield of 1.62 percent, breakevens suggest a real yield of minus 20bps. That compares with a Bund real yield equivalent of 0.7 percent (positive, of course). And a real 2y US Treasury yield of about two percent. And while BOJ rate hike bets are on the rise – a September quarter point hike is basically fully priced in while December has moved to a coin toss – it’s clearly not hawkish enough;

• S&P 500 futures are flattish while Asian equities are mixed. The Nikkei is up more than two percent on the back of the yen that has weakened further to 159.2 versus the greenback (about half the intervention gains have been erased). Chinese markets are down, but losses are only moderate. And in AI space, since the start of the month AI hyperscaler stocks (the average of eight hyperscalers) have risen by a modest 1.3% while hardware stocks are down 3.9% (average of twelve AI related hardware stocks);

• Looking ahead, today’s calendar is empty and focus will be on tomorrow's US CPI release, where consensus expects core to ease slightly to 2.5%. While the worst of the Iran war shock and tariffs shock is clearly behind us, there’s no reason to expect US core inflation to edge back down to two percent – the Fed’s problem of stubbornly elevated inflation dated from before the war.

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