Hikes not words

It’s been a month of action on the rates front, with three major economies raising benchmark interest rates by a quarter of a percent. Inflation remains persistent, and the bane of central bankers far and wide, as uncertainty remains around growth, energy, and security. Whilst one might assume this would show up as weakness in riskier assets, we continue to hold near record levels. Beyond the headlines, though, fragmentation remains. Themes continue to build not just around AI, but now its impact on what remains a finite and, in some instances, decreasing pool of liquidity in capital markets.
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Macro

Since our last musings the unfortunate truth is that we have seen conflict escalate. The good news? With the build-up in pressure, there are whispers of leaders wanting to return to the table as circumstances become less bearable. Might we be at the beginning of the end? The energy markets are off the highs, with oil falling from the loftier highs of $110/barrel to double-digits. In part driven by new supply chains coming online, the concern, though, remains further involvement by more parties in the Middle East. Yemen remains front and centre, adding a new dimension not just to the conflict but the ability to continue to limit supply via routes that previously aided safe passage. 

The Russia - Ukraine conflict has seen attacks further behind both enemy lines. The testing of NATO borders is very real, along with damage caused by longer-range Ukrainian projectiles affecting Russian domestic oil production and refinement. As we come into the colder months, any resolution would likely have far more impact now on inflation and the reversal of some sharp steepening of rate expectations. 

Mid-term elections in the US have far broader connotations given existing US foreign policy. Should President Trump be weakened by losing both the House and the Senate to the Democrats, it is possible we see a reversal of or, at the very least, considerably weakened ability to push any and all policy related not just to war but tariffs and their impact on prices to boot. It would actually be unusual for there not to be a shift to the opposing party in the States in the second term of an incumbent President, a trend that has stood since the times of Eisenhower.

As for Europe, the price action in France tells us there are very real decisions that need to be made regarding fiscal policy as the premium to borrow versus the more prudent (or at least currently better-rated) countries continues to rise. The latest result from the polls in Germany was also rather grim, with a further pivot to the most right of parties following what appears to be a failure of the centrists in assuring the electorate of their economic and social plans. 
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Risk

August brought not just record heat but record valuations, with the NASDAQ gaining a full 5% and the S&P in tow at 2.7%. Not bad for a month's work. All major US indices were in the green with the S&P 500, Dow Jones, and the Russell 2000 even setting all-time highs. The summer holiday, though, is starting to feel like a distant memory, along with said records now that folks have returned to their screens. The market giveth, and the market taketh away. This, along with the return of the Fed, saw not just an expected hike, but a steepening more aggressive than we have seen for some time. Despite the hike of last week, we did see stocks rally off the back of the action. The Fed taking prices seriously clearly matters. 

Dollar strength was also reinforced, a double-edged sword given it weakens the buying power of foreign governments that allocate to US treasuries to varying degrees. It also led to a slide in $-weighted investments including the German DAX index, off over 2%, and in part hampered by continued disruption to both natural gas and oil. 

Japan remains an outlier, up over 20% since the beginning of the year. In part, this has been down to reforms in corporate governance, but also the real return of inflation and importantly growth, and with that, expectation of future returns. It took roughly thirty years to get back to the highs of the late 80s, and just over two years to almost double from there. If you wanted an example of being a patient investor, that might be one for you, although opportunity cost is also real!
(Source: Bloomberg)
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Credit

The inevitable post-summer September ramping up in issuance was strong with benchmark deals coming to the market in size and being well-digested. Whilst there has been a widening in premia paid by the non-government community to borrow, it has remained muted. With nominal rates continuing to rise, the attractiveness of debt continues to increase with it and thus investors are not pressing for more return at this point, given the credit cycle is yet to turn. 

There have been a couple of interesting trends worth highlighting here. Firstly, we continue to see decent demand for US-headquartered corporations to raise both euros and pound sterling, with recent names including Uber and Amazon in large size and across multiple tenors. 

Sales of floating rate notes exceeded EUR 86 billion in 2026, the highest since the record years of 2014-15. With further hikes now expected, the demand from lenders to ensure they capture ever-higher nominal returns has been inevitable. Year-to-date, roughly 5% of European issuance has been in said structures, until the month of August, when this figure actually doubled, thus making borrowers more vulnerable to any future hikes and potentially putting additional pressure on ability to repay should inflation not be tamed.
(Source: Bloomberg)
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EUR

The beginning of September brought with it a widely expected 0.25% hike from the ECB. Whilst the variance in inflation between countries remains intact, overall increases in prices must be dealt with so as to avoid a rerun of almost double-digit price rises seen only a few years ago. We have had a couple of weeks to digest the accompanying statement and are now subject to further developments, not least the volatility and upward trajectory in energy prices. 

Germany, once dependable in generating real economic growth in the Eurozone, continues to face challenges, with Q3 GDP pencilled in for just 0.3%; although word from the Bundesbank is that we see acceleration before the year is done. As for France, to put additional context to the challenges currently faced, bond yields are now higher than those of Greece in what was unimaginable even a few quarters ago. 

Europe, as a net importer with little ability to store and transport fuel in the Eurozone, sees the projected interest rate curve remaining very much in steepening territory. For now, there is roughly a 56% chance of an additional hike in October and an almost fully priced-in hike right before Christmas.
(Source: Bloomberg)
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GBP

The Bank left rates unchanged, in line with expectations last week. The real news is the 6-3 split, with the minority prioritising concerns around  inflation over growth and jobs. The market was expecting to see more voting members seeking to raise rates, expectations being pushed out a little further. 

Quantitative tightening, or the selling of gilts which would in effect reduce liquidity in the system, has been paused until further notice. The decrease in prices and thus mounting paper loss is a real concern here with conversation around how and where this might be reflected gaining momentum. The timeline for when sales do resume (which is TBD) pushed out to 2034. Shorter-dated instruments will be allowed to mature whilst the longer-end (think 2034-49) will be held to maturity rather than disposed of here. Sales will also be to the Debt Management Office, as opposed to being into the market. Musical chairs anyone? The good news? The market took the news well with yields dropping from the highs and the curve flattening as expectations were reset on the biggest seller coming in and further spoiling the market. 

Treasury bill reform and decreased longer-dated issuance will make those such as us in the shorter maturity bucket more interesting with likely some pricing pressure leading to higher yields in this part of the curve.
The October 28 budget is fast approaching, just in time for Halloween. The Labour Government would do well to be market-friendly and fiscally responsible, although there is little room for a treat and even less scope for a trick. 

The labour market is cooling with the unemployment rate sitting at 4.9%, whilst total pay continues to grow, most recently at 4.1% (3 months, year-on-year). Growth has, thankfully, consistently beaten expectations, with July’s monthly GDP up 0.4% month-on-month versus an expected 0.00%, also known as none. 

As for hikes, given growth is outperforming, unemployment remains under control, and services inflation continues to be sticky, the only way is up. The November MPC meeting is 78%-priced for a 0.25% hike with terminal (or peak) base rate hitting 4.7% by the middle of next year (Bloomberg:WIRP). The BoE is the only major central bank not to have hiked this month, with a terminal rate predicted to be higher and coming sooner than anywhere else. One side has certainly got it more wrong than usual, time will tell.
(Source: Bloomberg)

USD

We started the year pricing a couple of cuts in, what we are getting is quite different, having just had the first hike since 2023 and another on the docket before the year is out. Higher for longer and more steepening is where things can typically break. Whilst we now get less rhetoric under Warsh, the market cannot be silenced. Interestingly the longer-run neutral interest rate (deemed to be where the dual mandate of inflation and employment sit in perfect equilibrium for sustainable growth) rose from just over 3% to 3.25% in a matter of days. Good news came from the longer end of the curve where the 10-year treasury yield fell, as if a vote of confidence evidencing an independent Federal Reserve, going a way to reversing the view that President Trump’s nominee would cut rates to appease. 

The reaction from the White House was swift and direct. The view from the Oval Office remains that the US continues to be the most creditworthy with rates also reflective of this and should therefore be several percentage points lower (1%...). 

As for the future path, market participants are currently pricing in 1.3 hikes by the end of the year with a terminal rate of 4.67% by September next year, so the potential for almost three more 0.25% hikes.
(Source: Bloomberg)

So what?

The market has returned and given us a steer on where the money is moving. The build-out in tech and all the associated upstream and downstream supply chains are not only adding to the demand for liquidity but also resources. 

With inflation already elevated, and central banks taking clear action rather than waging a war of words, the trajectory remains not just higher for longer, but potentially sooner. . Sentiment can certainly shift and do so swiftly, as has been witnessed time and time again. For those holding cash, it remains an environment with the potential to support the bottom line, provided capital is deployed thoughtfully, with certainty, security, and true liquidity in mind. Who knows what is coming around the corner next… best to be prepared.

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*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.