Surging oil prices and stronger producer inflation reinforced expectations of a September Fed rate hike. Meanwhile, the U.S. Treasury’s planned increase in long-dated bond buybacks fell short of market expectations, pushing Treasury yields higher and flattening the yield curve. Expectations for further policy tightening by the ECB and BOJ also lifted German and Japanese government bond yields to year-to-date highs. Against this backdrop, investors favored higher-yielding and more defensive Asian investment-grade bonds.
Surging oil prices and stronger producer inflation reinforced expectations of a September Fed rate hike. Meanwhile, the U.S. Treasury’s planned increase in long-dated bond buybacks fell short of market expectations, pushing Treasury yields higher and flattening the yield curve. Expectations for further policy tightening by the ECB and BOJ also lifted German and Japanese government bond yields to year-to-date highs. Against this backdrop, investors favored higher-yielding and more defensive Asian investment-grade bonds.
The ECB raised all three key policy rates by 25bps on September 10, bringing the deposit rate to 2.50% on September 16. While highlighting persistent inflation pressures from ongoing Middle East tensions, the ECB also warned of downside risks to growth. Following the latest hike, markets are now pricing in more than 75bps of additional tightening by April next year.
On September 10, the U.S. Treasury conducted buybacks of 10- and 20-year Treasury securities and increased the program size from US$2bn to US$6bn to support liquidity in older long-dated bonds and help contain rising term premiums. However, actual buybacks totaled only US$5.18bn, below market expectations of US$6-10bn, disappointing investors. While recent 10- and 30-year Treasury auctions indicated that demand for long-dated bonds remains resilient, concerns over rising future government debt issuance continue to weigh on sentiment. Going forward, investor confidence will largely depend on whether the U.S. government can maintain fiscal discipline and stabilize debt supply expectations.
2Q26 earnings results show that profit growth among S&P 500 companies has significantly outpaced debt growth. Large-cap companies, which benefit from stronger competitive moats, maintained gross margins near the highest levels since 2022, while net profit margins reached their highest level since 1998. Capital expenditures grew 25% YoY to a record high, with capex-to-EBITDA rising to 35%. We expect large U.S. corporations to continue increasing capital investment to support earnings growth while maintaining sufficient capital efficiency, with profits remaining above capital spending. This should help prevent excessive leverage buildup and preserve credit quality and debt-servicing capacity.
