September has already lived up to its reputation as one of the weakest months for US Treasuries. Over the past decade, the median return for US Treasuries in September has been -0.9%, while October has also been negative at -0.7%, according to market data. This September, Treasury performance is expected to be the worst since 2023. A mix of the US-Iran conflict, fiscal concerns in Washington, and a hawkish Federal Reserve stance has kept heavy pressure on the bond market heading into October.
Prashant Newnaha, a strategist at TD Securities, said the rates market in September has been nothing short of a disaster, and the pain trade could continue. As long as the Middle East situation remains unresolved, there is a risk of sustained de-risking in fixed income that could spill over into equities.
Pressure in the US Treasury market is also spreading globally. Yields on nearly all major maturities are near or above 5%, with markets worried that energy prices will push inflation higher and that massive government financing needs could force rates to stay elevated for longer. Major bond markets in the UK, Australia, and Japan have also seen selling, pushing the average yield on global government debt to 4% for the first time since 2007.
Yen carry trade unwind adds to bond selling
Inflation and fiscal deficits are not the only explanations for this wave of selling. Strategists at Citigroup believe the unwinding of yen-funded carry trades is helping drive US Treasuries lower. Such trades typically involve borrowing in low-cost yen and reinvesting in higher-yielding assets. Yardeni Research also sees the unwinding of yen carry trades as one of the key drivers behind the recent bond selloff. A global government bond index has fallen 2.1% so far this month, also set for its worst September since 2023. Rising yields across the board mean bond prices remain under sustained pressure.
However, high yields are starting to attract some long-term investors back into the market. Veteran Wall Street bond investor Jim Bianco has turned bullish on US Treasuries for the first time in six years. Chris Iggo, a long-term bond investor set to retire at the end of this month, also believes bonds could rebound after four difficult years. Arjun Vij, a Hong Kong-based portfolio manager at JPMorgan Asset Management, said the rise in real yields over the past year has created more value. He said duration looks broadly fairly valued at current levels and that risk-reward for long-term bonds in the US, Japan, and Australia is now more attractive.
October supply and rate expectations remain sources of pressure
Near-term risks for the bond market still skew toward further yield increases. Talks between the US and Iran over reopening the Strait of Hormuz have stalled, keeping oil prices high and reinforcing expectations of tighter monetary policy. Swap markets are now pricing in close to a full percentage point of cumulative Fed rate hikes over the next year. Markets in Canada, the UK, Australia, and Japan also reflect expectations of further tightening.
High yields could also exacerbate bond volatility through other channels. Alyce Andres, a strategist at Bloomberg's markets live blog, noted that the rapid rise in US Treasury yields has pushed mortgage rates to their highest since January 2025, which could trigger more hedging activity and create a self-reinforcing bond selloff. Masahiko Loo, a senior fixed income strategist at State Street Investment Management, said October is typically a period when the bond market faces a seasonal test. With bond supply increasing and investors returning after the summer lull, trading could pick up again. Loo said that heading into Thanksgiving, renewed growth in US Treasury supply, heavy credit issuance, and relentless demand for artificial intelligence capital expenditure suggest capital competition remains intense, and the risk of further volatility in US Treasuries remains high.
As a result, pressure on the bond market in October will depend not only on Federal Reserve policy but also on oil prices, fiscal financing, global bond yields, and corporate financing demand. Historical seasonality alone does not determine market direction, but with yields already at high levels, the bond market still lacks clear buffers.
Eaton Vance Municipal Bond Fund (EIM) was not mentioned in the original article but is included here as a reference symbol.
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