The Big Three
Bond markets feel the heat
The story dominating September and early-October’s headlines has been one of the sharpest sell-offs in government bond markets for years, pushing borrowing costs to levels not seen in decades. In the US, the 10-year Treasury yield rose by more than half a percentage point over the month, with the 30-year reaching its highest level since before the financial crisis. Japan’s 10-year yield moved above 3% for the first time since 1996, while the UK 30-year gilt yield crossed 6%.
Central banks have added to the pressure. The Federal Reserve raised rates by 25 basis points to 3.75%–4.00% on 16 September, its first increase since 2023. The European Central Bank also lifted rates, with energy costs linked to the Middle East keeping inflation well above target. The Bank of England held at 3.75%, though three of its nine members voted for a hike. In Europe, fiscal worries have deepened the move, with the premium on French oats over German bunds at its widest since the euro-area debt crisis.
Some relief came in early October when a weak US jobs report, showing payrolls rising by only 29,000, eased expectations of a further Fed hike. Even so, higher yields raise the hurdle for equity valuations and push up borrowing costs across the economy. That leaves the bond market as one of the key variables to watch into year-end.
Healey’s balancing act
Chancellor John Healey will deliver his first Budget on October 28th, and the bond market has already narrowed his options. Since he replaced Rachel Reeves in July under new Prime Minister Andy Burnham, gilt yields have climbed sharply, with the 10-year reaching around 5.2%, a level last seen in 2008. Higher debt-servicing costs have eaten into the government’s fiscal buffer, which KPMG estimates to have shrunk to around £12bn from almost £24bn in the spring.
The pressures go beyond borrowing costs. Inflation rose to 3.1% in August as energy prices linked to the Middle East fed through, while higher defence commitments add to the bill. Economists estimate the Chancellor will need to find about £10bn through tax rises or spending cuts to restore the previous margin of safety.
The wider implication is that credibility will matter more than any single measure. City leaders have warned that investors will punish any sign of fiscal looseness, and the gilt market has shown little patience this year. For investors, the Budget is a key event for sterling and UK assets. A credible plan would give yields room to settle, while a disappointment risks further volatility.
US midterms come into view
Americans head to the polls at the start of November for the midterm elections, with all 435 seats in the House of Representatives and 35 Senate seats being contested. Polling has moved against the Republicans in recent weeks. They now trail the Democrats by close to ten points on the generic ballot, and forecasters see a strong chance of the Democrats retaking the House, while the Senate looks more closely contested.
For markets, the most likely outcome is a divided Congress. However, history suggests this has tended to be a supportive backdrop for equities, as gridlock limits the scope for sweeping policy change. Morgan Stanley’s analysis shows that under a Republican president, the S&P 500’s strongest average return in the year after a midterm has come when Congress was split.
The run-up may be less comfortable. Government funding has only been extended to December 11th, which sets up a fiscal deadline shortly after the vote. A change in control of the House would also make it harder for the administration to pass its agenda on tax and trade. For investors, the election is unlikely to change the long-term picture, but it could add to short-term volatility at a time when bond markets are already on edge.
Sources: Trading Economics, FactSet, KPMG, Morgan Stanley, 07/10/2026.
