Global bond markets experienced their darkest September, with US Treasury yields surging to their highest levels since 2007, while stock markets bucked the trend and proved resilient.

The global bond market suffered a major blow in September, marking its worst monthly performance in years, while the stock market showed rare resilience under pressure from soaring borrowing costs. The divergence between the two asset classes has drawn widespread attention from the market.

The yield on 10-year U.S. Treasury bonds rose more than 45 basis points in a single month, reaching near its highest level since June 2007, marking the largest monthly increase in about two years. German and French 10-year bond yields hit 17-year and 18-year highs this week, respectively, with quarterly increases of approximately 70 and 120 basis points.

Factors driving this round of yield spikes include: deteriorating fiscal conditions of major economies, an oversupply of bonds, and inflationary pressures from the seven-month-long US-Israel war in Iraq, which has pushed up energy costs.

Meanwhile, New York Fed President John Williams recently explicitly opposed tightening monetary policy prematurely, causing a slight decline in the 2-year Treasury yield. However, the yield has still risen by more than 50 basis points this month, indicating that market disagreements on the policy path have not dissipated. In the stock market, strong earnings growth, global economic resilience, and continued enthusiasm for artificial intelligence have provided support for equity assets. European, American, and Asian stock indices generally recorded positive quarterly returns or limited declines, a stark contrast to the dismal performance of the bond market.

Debt Market Under Heavy Pressure: Triple Blow from Fiscal Policy, Supply-Side Components, and Energy

The global bond market faced multiple headwinds in September. Deteriorating government fiscal conditions pushed up sovereign credit premiums, a significant increase in primary bond supply exacerbated price pressures, and the US-Israel war in Iraq led to persistently high energy costs, further reinforcing market concerns about the sustainability of inflation.

The yield on 10-year US Treasury bonds was 5.209% in early European trading, up more than 45 basis points from the beginning of the month, marking the largest monthly increase in about two years. German and French bond yields hit multi-decade highs this week, with quarterly increases of approximately 70 and 120 basis points respectively. The yield on 10-year Japanese government bonds also hovered near multi-decade highs, with a quarterly increase of about 38 basis points.

"We've reached a truly significant yield level, and the impulse for investors to withdraw funds from the stock market could become a problem," said Carlo Franchini, Head of Clients at Banca Ifigest in Milan. Sovereign yields, serving as a pricing anchor for global markets, have risen rapidly, directly increasing the reference costs for stocks, mortgages, and corporate financing.

Williams stated that tightening expectations will be temporarily suspended, but market divergence remains.

John Williams' remarks provided a brief respite for short-term interest rates. The 2-year Treasury yield fell slightly by 1.9 basis points to 4.870% after his speech, but the cumulative increase for the month still exceeded 50 basis points, indicating that the market's pricing in policy tightening has not fundamentally reversed.

Williams' explicit opposition to premature policy tightening has, to some extent, suppressed market expectations for accelerated action by the Federal Reserve. However, the yield curve remains high overall, indicating that investors' concerns about the inflation outlook and fiscal sustainability have not subsided. The tension between the bond market and policy expectations constitutes one of the core contradictions in the current divergence in cross-asset pricing.

Stock Market Defies Trend: Earnings Growth and AI Enthusiasm Provide a Strong Defense

Despite a sharp rise in borrowing costs, global stock markets as a whole have shown remarkable resilience.

The pan-European STOXX 600 index rose 0.6% on the day, and although it fell slightly by 1.4% for the month, it was essentially flat for the quarter. The MSCI Asia Pacific ex-Japan index fell about 1.1% for the month, while the Nikkei 225 index rose 0.6% for the month. Nasdaq futures and S&P 500 futures both rose slightly.

In a report, Mohammed Apabhai, Head of Trading Strategy for Asia Pacific at Citigroup, noted, "What surprised us was the calm reaction in the stock market, with nominal GDP growth driving earnings optimism." He also pointed out that the US stock market's reaction to rising yields was mainly focused outside the technology sector, with technology stocks, supported by the AI theme, showing relative resilience.

Carlo Franchini stated that he has not yet taken profits on his stocks and is betting that the stock market could continue to find support in October if tensions in the Strait of Hormuz ease and oil prices fall. "In my view, it's more appropriate to continue holding long positions."

The dollar strengthened, and the euro fell to a 16-month low.

Rising yields drove the dollar to a monthly gain of about 2% in September, although it fell slightly by 0.1% on the day.

The euro fell to near a 16-month low, trading at $1.1346, down about 2.3% this month, dragged down by both the global energy shock and European political risks.

The pound fell about 2.1% this month. The yen appreciated slightly by about 1.7% to 156.95 this month as markets became wary of the risk of joint intervention by Tokyo and Washington.

In commodities, supported by concerns about ongoing supply disruptions due to the Middle East conflict, Brent crude oil closed at $102.47 per barrel, and U.S. crude oil closed at $89.41 per barrel, both recording monthly gains. Spot gold rose 0.44% to $4,199.28 per ounce.

Behind the divergence: a potential rift between risk appetite and policy expectations

The coexistence of a sharp decline in the bond market and a resilient stock market reflects the inherent divergence in risk appetite and policy expectations within the current market. The pricing logic of the bond market points to persistent inflation, increasing fiscal pressure, and the risk of policy tightening; while the stock market is more anchored to the real support of profit growth and the long-term narrative driven by AI.

Whether this divergence can continue largely depends on energy price trends and the evolution of the geopolitical situation. If oil prices fall due to a de-escalation in the Middle East, pressure on the bond market may ease, and the gap between stocks and bonds may narrow. Conversely, if yields continue to rise, the "impulse to withdraw funds from the stock market" warned by Carlo Franchini may gradually become a reality, at which point the resilience of the stock market will face a more severe test.

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