September proved another punishing month for fixed income investors, according to the latest Fixed Income Briefing from Exante, as a hawkish Federal Reserve, resilient business activity and renewed inflation pressures combined to drive a pronounced bear flattening across government bond curves.
Exante notes that the dollar firmed throughout the month, with the dollar index up 1.80% month-to-date, supported by a more hawkish Fed outlook and strong economic data.
The labour market picture, however, is more mixed than the headline numbers suggest. Figures from the US Bureau of Labor Statistics showed non-farm payrolls rose by 162,000 in August. June’s figure was revised up by 11,000 to +31,000, while July’s was revised from -23,000 to +21,000. Unemployment held at 4.1%, with around 7.0 million people out of work. The participation rate edged up to 61.6%, though it remains 0.5 percentage points below January’s level. Average hourly earnings grew 0.3% on the month and 3.1% year-on-year.
Business activity painted a far stronger picture. Exante highlights that the S&P Global Flash US Composite PMI climbed to 58.4 from 56.0 in August, a 62-month high and the fourth consecutive month of accelerating growth. Services led the way, rising to 58.7, a 59-month high, while manufacturing jumped to 57.0 from 53.9, its highest in 52 months, albeit slightly short of expectations. New orders reached their strongest levels since 2022 in both sectors, and hiring grew at the fastest pace in over four years.
Consumers, by contrast, are growing gloomier. The University of Michigan Consumer Sentiment Index fell 7.5% to 47.8, with expectations dropping sharply to 45.8 from 51.5. Sentiment now sits 16% below February, before the Iran conflict began, and 13% lower than a year ago. Year-ahead inflation expectations rose to 4.6% from 4.0%, the highest since June.
Inflation itself is reaccelerating. Headline CPI rose 0.4% in August after 0.1% in July, taking the annual rate to 3.4%. Core CPI increased 0.3% on the month, though the annual core rate eased to 2.4% from 2.5%. Energy prices rose 2.1%, with gasoline up 3.9% and responsible for more than a third of the monthly increase. Services inflation excluding energy rose 0.23% on the month and 3.0% on the year.
Exante points to a long list of headwinds for bonds: food price risks following Europe’s summer drought and fertiliser shortages linked to Gulf hostilities, oil holding above $100, political uncertainty ahead of the US midterms, unexpected election results in Germany, France’s upcoming election, ongoing Bank of Japan intervention to support the yen and nerves over the UK’s autumn budget.
The US 10-year yield rose 37bps over the month, against a 27.7bps rise in the German 10-year Bund, widening the spread to 156bps from 142bps. At the long end, the US 30-year climbed 12bps and the German 30-year 8.8bps. According to Exante, the sharper move in US rates may also reflect AI-related bond issuance and heavier overall debt supply.
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