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Investment Monthly

Bonds go back to the future

08 October 2026

Articles

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Key Takeaways:

House View

Our central scenario remains a “broadening out” of profits and market performance, helped by AI spillover effects. Markets should remain resilient, but sticky inflation, higher real yields, and geopolitical risks could cause volatility
Equities are supported by strong earnings, but stretched valuations, and concentrated AI exposure leave little room for disappointment. As the AI capex boom matures, upstream and downstream sectors should benefit
We see strength in Japan, emerging markets and selected European equities, alongside high-quality investment-grade credit and EM fixed income. Elevated DM government bond yields can provide income for portfolios. In periods of market stress, bonds’ hedging characteristics should also re-emerge

Macro Outlook

Continued Middle East tensions have boosted oil and refined product prices. Elevated energy prices have raised concerns about upside inflation risks and contributed to a rise in bond yields across many economies
US domestic demand is solid but imbalanced. However, strong profits should support a broadening out of investment beyond AI, improved labour market conditions, and a gradual rebalancing of the K-shaped dynamics
AI and policy buffers have supported Asia’s growth, but it is exposed to the risk of global AI demand shifts and energy supply shocks. China’s growth is resilient amid technology and export strength, but still imbalanced

Policy Outlook

Policy uncertainty is high. Central banks are facing difficult growth-inflation trade-offs due to supply-side shocks. Fiscal and industrial policy is more activist, but elevated government debt is a constraint
The Federal Reserve hiked by 25bp with the projections suggesting 1-2 more increases in this cycle. Recent ECB comments suggest further tightening, but the rate path is dependent on energy prices. The BoE signalled a near-term rate hike
The interplay of energy headwinds, tech tailwinds, and fiscal support has driven a hawkish monetary policy tilt across Asia amid higher global rates. China’s policy balances short-term macro stability with longer-term structural priorities

Scenarios

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House View

Market leadership should broaden out as the AI boom matures, but sticky inflation, higher real yields and geopolitical uncertainty could cause volatility. Stocks are supported by strong profits, but stretched valuations and concentrated AI exposure are risks. Value plays – including emerging market stocks and fixed income – can provide portfolio diversification

Equities – Global stock markets are being supported by strong earnings momentum, but valuations – particularly in the US – leave little room for error. High valuations, AI concentration, and geopolitical risks could cause episodic volatility
Government bonds – A higher-for-longer rates regime offers an opportunity to generate income from DM bonds. If inflation stays anchored, bonds could re-emerge as an effective hedge in periods of macro weakness or equity market stress
Corporate bonds – Investment grade spreads are tight, but attractive all-in yields and healthy balance sheets are supportive. Selectivity is key given that surging issuance by AI hyperscalers risks magnifying tech exposure in multi-asset portfolios

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Asset class performance at a glance

Developed market government bonds sold-off sharply in September as markets priced higher-for-longer rates, fiscal concerns, and robust growth. Global equities declined, but tech stocks were resilient given their strong earnings outlook and the AI investment boom. Alternatives were mixed, with oil and crypto strong but gold and listed real assets weak

Government bonds – Sovereign bonds fell (yields rose sharply) in response to sticky inflation and a higher-for-longer rates outlook, fiscal concerns, and competition for flows amid heavy credit issuance by AI hyperscalers
Equities – Global equities saw modest declines, but the AI boom provided some resilience, with technology-led markets still strong. Japan and Latin American indices also managed to deliver positive returns. China and India remained subdued
Alternatives – Rising bond yields and a stronger US dollar contributed to a slump in the gold price during the month. Oil prices remained elevated and crypto assets saw further gains, while infrastructure and real estate indices declined

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The commentary and analysis presented in this document reflect the opinion of HSBC Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Asset Management. Consequently, HSBC Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. The views expressed above were held at the time of preparation and are subject to change without notice. The level of yield is not guaranteed and may rise or fall in the future. Source: Bloomberg, all data above as at close of business 30 September 2026 in USD, total return, month-to-date terms. Note: Asset class performance is represented by different indices. Global Equities: MSCI ACWI Net Total Return USD Index. Global Emerging Market Equities: MSCI Emerging Market Net Total Return USD Index. Corporate Bonds: Bloomberg Barclays Global HY Total Return Index value unhedged. Bloomberg Barclays Global IG Total Return Index unhedged. Government bonds: Bloomberg Barclays Global Aggregate Treasuries Total Return Index. JP Morgan EMBI Global Total Return local currency. Commodities and real estate: Gold Spot USD/OZ, Other commodities: S&P GSCI Total Return CME. Real Estate: FTSE EPRA/NAREIT Global Index TR USD. Crypto: Bloomberg Galaxy Crypto Index. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index.

Macro scenarios

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Market scenarios

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Economic outlook

Managing inflation risks

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Events calendar: H2 2026

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Investment Views

Asset class positioning

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Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. Diversification does not ensure a profit or protect against loss. The views expressed above were held at the time of preparation and are subject to change without notice. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management as at October 2026.

On Top of Investors’ Minds

Will stocks crack under the weight of higher bond yields?

G7 bond yields have continued to increase in September. The rationale for the move higher probably reflects a combination of lingering fiscal concerns, stronger growth and sticky inflation, and indigestion coming from government and AI hyperscaler issuance.

For investors, a higher-for-longer regime could offer an opportunity to generate income from G7 bonds. But another key consideration is whether higher yields will break the stock market, along with other riskier asset classes. The 10-year yield at 5 per cent has been widely touted as a key tipping point.

The good news right now is the positive impact of the AI boom, that offsets other headwinds and buoys investor confidence and equity multiples. There will likely need to be a more decisive swing in investor enthusiasm around AI for there to be a major problem.

It will also be important to monitor the reaction of government to higher yields. At some point there could be pressure to cut deficits to keep debt trajectories under control. But a return to 2010s levels of austerity remains highly unlikely.

But crucially we know that if inflation is anchored at 2–3 per cent, central banks would retain the flexibility to adopt a dovish stance in periods of significant macro or market stress.

US 10-year yields and breakeven inflation, per cent

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Could recent US dollar strength persist and how vulnerable is EM?

The US dollar has strengthened recently, supported by higher Treasury yields and rising oil prices. A hawkish 25bp Federal Reserve hike reinforced expectations of higher-for-longer interest rates, lifting both US yields and the dollar.

There are a few reasons to suggest why dollar strength may not persist. Other major central banks also face renewed inflation pressures, potentially limiting the US interest-rate advantage. Moreover, the relationship between the dollar and relative interest rates has been unstable in recent years and higher yields alone may not be enough to boost the currency. We also know that the dollar is still expensive on longer-term valuation measures.

But even if the dollar were to strengthen further, this may not be as bad for the EM complex as it has traditionally been. This year EM currencies have gained despite a strong dollar. This likely reflects the effects of better and more orthodox policymaking, the development of macro “fortresses”, and wide real yield cushions established by early rate hikes.

With EM currencies trading at historically cheap valuations and increasingly detached from Western cycles, we think there are opportunities for EM currency exposure to provide a durable, independent source of total return in global portfolios.

US dollar and EM FX indices

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Will Western central banks deliver the hikes markets expect?

It’s been clear from recent Fed communications and September's rate hike that ignoring persistently above-target inflation is no longer an option. Amid higher oil prices, markets have responded by pricing in a significant degree of tightening: another Fed hike this year and two more in 2027.

However, the unbalanced nature of growth, combined with potential for supply-driven inflation to squeeze real incomes and profits of weaker consumers and businesses, means policy tightening could have unintended negative consequences.

Therefore, another one or two rate hikes appears to be a sensible middle ground that allows the Fed to manage upside inflation risks while limiting the chances of precipitating a downturn. It is also worth keeping in mind that core PCE, the Fed’s preferred measure of underlying inflation may be overstating inflation – other measures are closer to the Fed’s 2 per cent target.

For the Bank of England and European Central Bank (ECB), the outlook is more challenging. Their sensitivity to oil prices has also resulted in a significant degree of tightening being priced in. But much weaker growth, strained public finances and the possibility that energy prices normalise implies a higher chance that less tightening is actually delivered.

How many rate hikes from Fed, ECB, BoE in 2026?

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Market Data

September 2026

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Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index.
Sources: Bloomberg, HSBC Asset Management. Data as at close of business 30 September 2026. (*) Indices expressed as total returns. All others are price returns.

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All total returns quoted in USD terms.
Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging Markets Total Return Index.

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Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. This information shouldn’t be considered as a recommendation to invest in the country or sector shown. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Sources: Bloomberg, HSBC Asset Management. Data as at close of business 30 September 2026.

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Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. This information shouldn’t be considered as a recommendation to invest in the country or sector shown. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Sources: Bloomberg, HSBC Asset Management. Data as at close of business 30 September 2026.

Important Information

Basis of Views and Definitions of ‘Asset class positioning’ tables

Views are based on regional HSBC Asset Management Asset Allocation meetings held throughout September 2026, HSBC Asset Management’s long-term expected return forecasts which were generated as at 31 August 2026, our portfolio optimisation process and actual portfolio positions.
Icons: ⭡ View on this asset class has been upgraded – No change 🠗 View on this asset class has been downgraded.
Underweight, overweight and neutral classifications are the high-level asset allocations tilts applied in diversified, typically multi-asset portfolios, which reflect a combination of our long-term valuation signals, our shorter-term cyclical views and actual positioning in portfolios. The views are expressed with reference to global portfolios. However, individual portfolio positions may vary according to mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions.
“Overweight” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would have) a positive tilt towards the asset class.
“Underweight” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would) have a negative tilt towards the asset class.
“Neutral” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks HSBC Global Asset Management has (or would have) neither a particularly negative or positive tilt towards the asset class.
For global investment-grade corporate bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, USD investment-grade corporate bonds and EUR and GBP investment-grade corporate bonds are determined relative to the global investment-grade corporate bond universe.
For Asia ex Japan equities, the underweight, overweight and neutral categories for the region at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, individual country views are determined relative to the Asia ex Japan equities universe as of 31 August 2026.
Similarly, for EM government bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, EM Asian Fixed income views are determined relative to the EM government bonds (hard currency) universe as of 30 September 2026.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Diversification does not ensure a profit or protect against loss. You cannot invest directly in an index.

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