Global financial markets entered the final quarter of 2026 with an unusual combination of resilience and tension. Equities remained close to record highs, supported by strong corporate earnings and continued enthusiasm around technology and artificial intelligence. Yet beneath the surface, conditions became more challenging as government bond yields climbed sharply and investors confronted renewed inflation concerns.
September provided a reminder that even strong equity markets are not immune to instability elsewhere in the financial system.
Long-term borrowing costs rose significantly across the US, Europe and Japan, driven by higher energy prices, changing monetary policy expectations and concerns about the growing supply of government debt. At the same time, shifts in Japan’s financial system could have important implications for global bond demand, while the prospect of several enormous AI-related stock market listings may soon test some of the private market’s most ambitious valuations.
Together, these developments create an investment environment characterised by strong earnings and technological optimism on one side, and higher financing costs, tighter liquidity and valuation risks on the other.
Global bond yields move sharply higher
One of the most important market developments during September was the sharp rise in government bond yields.
The yield on the 10-year US Treasury climbed to 5.34%, its highest level since 2002, after increasing by around half a percentage point during the month. The 30-year Treasury yield reached 5.6%, also returning to levels last seen more than two decades ago. caa0d6d9-5acd-4ed6-8b23-66eb2e7…
The move was not limited to the United States.
Government bond yields in Germany and France reached their highest levels in 17 and 18 years respectively, while Japan’s 10-year government bond yield rose above 3%. Since June, the Japanese yield has increased by approximately 0.42 percentage points. caa0d6d9-5acd-4ed6-8b23-66eb2e7…
For investors, higher bond yields matter because they raise the cost of borrowing across the economy. Governments pay more to finance debt, companies face higher funding costs and consumers can encounter more expensive mortgages and credit.
Higher yields can also make bonds more attractive relative to equities. When investors can earn more from government debt, the valuation they are willing to place on future corporate earnings may fall.
This is particularly relevant for growth-oriented sectors such as technology, where valuations often depend heavily on expectations for profits many years into the future.
Energy prices revive inflation concerns
The immediate catalyst for the bond market sell-off was renewed concern about inflation.
Brent crude oil rose 14% during September to approximately $103 a barrel as the US-Iran impasse continued. Rising energy prices increased the risk that inflationary pressures could persist, prompting central banks to take a more cautious stance. caa0d6d9-5acd-4ed6-8b23-66eb2e7…
The US Federal Reserve responded by raising its policy rate to a range of 3.75% to 4.00%, its first increase since 2023, and indicated that another rate rise could follow before the end of the year.
Japan also tightened policy, with the Bank of Japan raising its main interest rate to 1.25%, its highest level since 1995.
The Bank of England left rates unchanged at 3.75%, although three of its nine policymakers voted in favour of an increase. caa0d6d9-5acd-4ed6-8b23-66eb2e7…
Inflation is not the only factor pushing yields higher. Large fiscal deficits and heavy government bond issuance are increasing the amount of debt that markets must absorb. In the United States, additional borrowing linked to AI-related infrastructure spending is adding further pressure.
That combination — persistent inflation risk, restrictive monetary policy and substantial new borrowing — has pushed investors to demand higher yields for holding longer-dated bonds.
Equities remain surprisingly resilient
Despite the turmoil in bond markets, equities have so far proved relatively resilient.
The S&P 500 fell only around 0.5% in September and still gained approximately 2% over the third quarter. The technology-heavy Nasdaq rose 1.9% during the month. caa0d6d9-5acd-4ed6-8b23-66eb2e7…
However, market performance remains highly concentrated.
The Dow Jones Industrial Average declined 4.3% during September, while US financial shares fell by more than 6%. European markets also weakened, with the STOXX 600 recording its first monthly decline in six months.
Chinese equities remained near their annual lows despite further promises of policy stimulus.
The relative strength of US equities is being supported in part by corporate profits. Third-quarter earnings growth was forecast at just under 30%, providing a significant cushion against the negative effect of rising bond yields.
This divergence is important.
At headline level, major equity indices may continue to appear healthy, but the underlying performance of different sectors and markets is becoming increasingly uneven. A market driven by a narrow group of large technology companies can remain strong for some time, but concentration also increases vulnerability if sentiment towards those companies changes.
The dollar strengthens while commodities diverge
Higher US interest rates also supported the US dollar.
The dollar gained 2.2% against the euro during September, marking its strongest monthly performance against the single currency in 14 months.
Commodity markets, meanwhile, delivered sharply contrasting performances.
Gold fell 6.6% during September as higher real interest rates reduced the appeal of an asset that does not generate income. Despite the decline, gold remained around 10% higher than a year earlier.
Silver has experienced a considerably larger correction and is now roughly half its January record level.
Copper has moved in the opposite direction. Supported by constrained inventories and Chinese demand, copper has risen by approximately one-third over the past year.
The market commentary’s September return chart on page 7 illustrates how dispersed performance was across regions and asset classes. Oil rose strongly, while gold declined, and equity returns varied significantly between the US, UK, continental Europe, Japan, Brazil, Australia and China.
Bitcoin also enjoyed a strong quarter, rising 42%, its second-best third quarter on record. Renewed inflows into exchange-traded funds supported demand, although the cryptocurrency remained below the level at which it started the year.
Japan’s money may gradually come home
A potentially important structural shift is now taking place in Japan.
For decades, extremely low Japanese interest rates encouraged households, banks, insurers and other institutions to invest abroad in search of higher returns. As a result, Japanese investors became major holders of international assets, particularly US government bonds.
Japan developed into the world’s largest creditor and became one of the most dependable sources of demand in global bond markets.
That dynamic is beginning to change.
With the Bank of Japan’s policy rate at 1.25% and the 10-year Japanese government bond yield now above 3%, Japanese investors can earn a much more meaningful return at home.
The incentive to move money overseas is therefore becoming weaker.
HSBC estimates cited in the commentary suggest that Japanese banks have sold approximately $70 billion of foreign bonds this year, after buying around $35 billion the previous year. Life insurers may eventually follow, although these investors generally move cautiously and prefer to wait for yields to stabilise.
This matters because Japan owns roughly $1 trillion of US Treasuries.
The adjustment is unlikely to occur through sudden large-scale selling. Japanese institutions are more likely to allow bonds to mature and simply reinvest less of the proceeds abroad.
Even a gradual withdrawal, however, removes an important source of demand at precisely the time when the US government is issuing substantial quantities of new debt.
That could contribute to keeping US bond yields higher for longer.
Why the yen remains important
One might expect money flowing back towards Japan to strengthen the yen significantly, but that has not yet happened.
In July, the currency fell to almost 164 yen to the US dollar, close to a four-decade low. That prompted record intervention by Japanese and US authorities. Although the yen subsequently recovered, much of the gain was later reversed.
The underlying challenge is the persistent interest-rate gap between the US and Japan.
US interest rates remain approximately 2.5 to 2.75 percentage points higher than Japanese rates. With the Federal Reserve still expected to tighten further, Japan has limited scope to close that gap aggressively, particularly given government debt exceeding 250% of GDP.
The yen therefore remains an important variable for global markets.
A sharp appreciation could force investors who have borrowed cheaply in yen to fund investments elsewhere to unwind those positions. This so-called “carry trade” can magnify market volatility when investors rush to exit simultaneously.
A similar dynamic unsettled global markets in 2024.
Mega AI IPOs could reshape public markets
Another major theme for investors is the possibility that some of the world’s largest privately held AI companies may soon enter public markets.
Anthropic and OpenAI are both moving closer to potential US stock market listings, according to the commentary.
Anthropic’s revenue rose twelvefold to nearly $4.6 billion in 2025, but its operating loss widened substantially to $8.1 billion. The company plans enormous spending on computing power and infrastructure and is targeting a valuation above $2 trillion.
OpenAI, meanwhile, was last valued at $852 billion and is leaning towards a possible listing in 2027.
The scale of these companies means their eventual IPOs could have consequences far beyond the businesses themselves.
Together with SpaceX, the three listings could potentially raise around $200 billion — approximately two to four times the amount raised by all US listings during 2025.
Index providers are also changing their rules so that very large new companies can enter major indices more quickly.
That could create an unusual supply-and-demand imbalance.
If only 3% to 8% of each company’s shares are initially available to public investors, index-tracking funds may be forced to compete for a relatively small amount of stock. This could increase concentration within indices that are already heavily exposed to AI-related companies.
Public markets will finally test private AI valuations
Perhaps the most important consequence of these IPOs will be greater transparency.
Private companies are not subject to the same level of financial disclosure and continuous market scrutiny as listed businesses. Public listings would give investors far more insight into revenue, expenses, capital expenditure and the financial relationships between companies throughout the AI ecosystem.
This could help answer one of the biggest questions currently facing markets: whether the extraordinary valuations attached to leading AI businesses can be justified by their eventual profitability.
Whichever major AI company lists first may set an important benchmark.
A successful debut could reinforce enthusiasm for the sector and encourage a wave of additional listings. A disappointing reception, however, could force investors to reassess private market valuations across the broader AI industry.
What does this mean for investors?
The current environment illustrates why headline market performance does not always tell the full story.
Equities remain resilient, corporate earnings are strong and AI continues to generate considerable investor enthusiasm. Yet several important risks are developing simultaneously.
Higher government bond yields are increasing financing costs. Energy prices have revived inflation concerns. Central banks remain willing to tighten policy. Governments continue to issue substantial quantities of debt, while one of the world’s most important sources of international capital — Japan — may gradually become less willing to invest abroad.
At the same time, equity market leadership remains concentrated and some of the most highly valued AI companies in the world may soon face the scrutiny of public investors.
None of these factors necessarily points to an immediate market reversal. However, they do suggest that investors should expect periods of volatility as markets adjust to a world in which capital is no longer as cheap or abundant as it was for much of the previous decade.
For long-term investors, diversification remains particularly important. Strong performance from a narrow part of the market can be rewarding, but relying excessively on a single sector, investment theme or geography can also increase portfolio risk.
The months ahead are therefore likely to be shaped by the interaction between two powerful forces: optimism surrounding corporate earnings and technological progress, and the increasingly restrictive effect of higher interest rates and bond yields.
How that tension is resolved could determine the direction of global markets well into 2027.
