September was dominated by a renewed focus on fiscal sustainability in developed markets, with investors demanding greater compensation to hold the debt of governments with deteriorating fiscal positions. France was at the centre of the move: concerns over a widening budget deficit, a record borrowing programme for 2027 and political uncertainty ahead of next year’s elections pushed 10-year OAT yields to their highest level since 2002, with the spread to Bunds widening towards levels last seen during the euro-area debt crisis. Contagion spread to the periphery, with Italian spreads back above 100bp despite Italy’s improving fundamentals.
The tone had been set at the end of August at Jackson Hole, where Fed Chair Kevin Warsh described US labour markets as “quite stable” and “consistent with full employment”, while arguing that inflation remained above target and that the Fed’s “predominant focus” should be on prices. Markets rightly read this as confirmation that inflation, not employment, was the dominant policy concern, and the FOMC duly delivered a 25bp hike on 16 September, its first since 2023, with the majority of members projecting further tightening this year.
Against this backdrop sovereign bond markets remained under pressure throughout the month. US front-end yields rose as the policy path was repriced higher, while the 10-year returned to around 5.25%, near its highest level in almost two decades. Fiscal concerns and heavier government borrowing requirements remained key drivers of volatility, making for a challenging environment for outright duration exposure.
