Market Thoughts: On your marks…?

While government bond markets have tried to settle, investors remain anxious. That said, equity and credit markets are well-supported. The grounding factor? Strong earnings and healthy balance sheets. It also helps that we’re in the last few weeks of summer holidays.

September’s going to be busy. The Federal Reserve (Fed), European Central Bank (ECB), Bank of England and Bank of Japan (BoJ) each have monetary policy meetings. The BoJ seems most likely to raise rates, along with the ECB. The Fed is creeping up in the rankings.

The recent break higher in longer-dated yields came (amongst other things) in response to the BoJ’s unwillingness to raise rates. That brought intervention from the U.S. Treasury and Japan’s Ministry of Finance (MoF) to help stabilize the yen.

A BoJ rate hike would help take some pressure off the yen. It should also help longer-dated Japanese government bonds (JGB) settle. The reality is the BoJ has more work ahead of it. If they don’t raise rates in September, I’d expect to see both the yen and yields again quickly strained.

Government bonds largely reflect domestic economies. That includes fiscal discipline (or lack thereof), domestic debt load and expected future issuance. The U.S. has been a poster child of that trifecta recently. Not in a good way. Developed market government bond markets are interconnected.

One of the reasons the U.S. Treasury intervened with the MoF was because rising JGB yields were taking the U.S., not to mention European bonds yields, along for the ride. JGBs were beginning to disturb what appeared to be bond markets that found short-term equilibria.

Intervention doesn’t fix structural challenges; it ‘warns’ short sellers. It doesn’t take away the fundamental reasons for the trade. That remains the case for the yen, just as much as it does long-dated U.S. government bonds. Sticky inflation, too much debt, lots of issuance. Oh my.

A Japanese rate hike in September would help dial back the unease that continues across bond markets. Higher short-term yields in the U.S. are doing some of the Fed's work for it. We'll see if that compels the FOMC to hike at their next meeting. Every meeting's live.

Across our multi-asset portfolios, we’ve modestly trimmed duration. We rotated some full curve and longer dated Treasury exposure into the short-end of the curve. With bond markets bumpy, it seemed prudent to tighten the reins in a bit.

Seasonality gets more challenging over the next few months. Markets tend to smooth out into year-end. But to state the obvious, every year brings its own narrative and market path. If this year ‘is different,’ it’s in the list of challenges. They only seem to grow, not to mention escalate.

U.S. mid-term elections take center stage in September – additional noise investors will have to process. Markets favor divided government. Less gets done. If that’s where we land come November, it may prove a tailwind into year-end. All else equal, which it never is.

With Nvidia earnings behind us, consensus expectations for S&P 500 revenue and earnings growth this year are around 15% and 55% respectively. Adjusting for unrealized investment gains, EPS growth is forecast to print 35% for the year.

With September ahead, slow down if you can. Investors already had a full agenda to deal with. It seems we’re only adding to it, as the race into year-end kicks off. On your marks…?

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 8/27/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.