US Bond Market Suffers as Hawkish Fed and Strong Economy Drive Interest Rate Hikes

The US bond market suffered in September as interest rates rose in response to a hawkish Federal Reserve, according to Exante's Fixed Income Briefing. The dollar index increased by 1.80% over the month, driven by strong economic data and a more aggressive Fed outlook.

While non-farm payrolls rose by 162,000 in August, with revisions to previous months' figures also showing growth, the labor market picture is more complex than headline numbers suggest. Unemployment held steady at 4.1%, but around 7.0 million people remain out of work.

Business activity painted a stronger picture, however. The S&P Global Flash US Composite PMI rose to 58.4 in August, its highest level since 2022 and the fourth consecutive month of accelerating growth. Services and manufacturing both showed significant increases, with new orders reaching their strongest levels since 2022.

Consumers are growing increasingly gloomy, however, as the University of Michigan Consumer Sentiment Index fell by 7.5% to 47.8 in August. Year-ahead inflation expectations rose to 4.6%, and headline CPI reaccelerated to 3.4%. Exante notes a long list of headwinds for bonds, including food price risks due to Europe's summer drought and ongoing Bank of Japan intervention.

The US 10-year yield rose by 37 basis points over the month, while the German 10-year Bund increased by 27.7 basis points. The spread between the two widened to 156 basis points from 142 basis points.