Bonds face brutal quarter as Middle East war fuels inflation fears

This has left stocks propped up by the AI trade, even as the substantial investment required for AI infrastructure causes growing investor nervousness. Much of the market action is currently concentrated in bonds. The yield on the benchmark 10-year US Treasury note has climbed 81 basis points in the July-September quarter, on track for its steepest increase since 2022, pushing borrowing costs to a 19-year peak. A clear indication of this higher-rate paradigm is evident in Japan, where the yield on its 10-year bond has risen 42 basis points this quarter, set for its largest increase in over two decades.

While rising yields have made government bonds attractive again for some investors, others remain cautious about long-dated bonds due to concerns over high government debt. Stocks, however, have largely disregarded the impact of soaring yields, primarily because investors are pinning their hopes on AI-related developments. A series of economic data releases later in the day are expected to offer further insights into the state of the European economy and the outlook for monetary policy. October is anticipated to bring new challenges, including the latest US jobs and inflation data, French budget discussions, a UK budget, and likely increased bond issuance from technology firms.