Reflections of the CIO August 2026...

August was a month where bond markets traded very nervously and equity markets behaved in the opposite manner, recovering their poise to post strong positive returns after several months of high volatility.

As mentioned in prior reports, a cocktail of strong economic growth, sticky inflation, concerns over government spending and erratic communication from the Federal Reserve had been steadily undermining confidence in the global bond markets for several months. This has largely resulted in bond prices falling and bond yields rising. To add to this list of negative influences, we should also include the effect of rising oil prices and the increasing competition for funds from the AI hyperscalers, who are seeking ever larger amounts from investors to fund their enormous infrastructure rollouts.

The pressure from all these issues resulted in a selloff in the bond markets during August, particularly in longer dated maturities.[1] This, in turn, prompted an important intervention from the US Treasury Secretary, Scott Bessent, who announced the doubling in size of his departments buyback programme for US government bonds.[2] Although small in quantum, the signalling effect was powerful and the bond market took notice. Selling pressure began to dissipate and the upward march in bond yields began to level out.

Towards the end of the month an additional intervention from the US authorities came from Chairman Warsh of the Federal Reserve. His speech at an international meeting of central bankers was widely interpreted as being much more hawkish than previous communications, focussing as it did, on the effort to combat inflation.[3] The combined push from these two important voices had the desired effect, with nervous US bond markets calming somewhat as they factored in a serious effort to deal with inflation and reduce the volatility of market prices.

Whilst all this was going on, equity markets shrugged off both these issues and the reversals of previous weeks to bounce back across the board. The underlying reason was again the evidence from the corporate sector, which continued to report strong profit growth and, in general, guided for more to come.[4]Although different in magnitude, this optimism is a feature of global equity markets and not just the USA. A strong economy may stoke inflation concerns for bond investors, but it also simultaneously raises profit expectations for equity owners.

Elsewhere, gold prices recovered during the month as the world’s central banks resumed their buying, seeking alternatives to holding US dollars in an era of geopolitical instability. Oil prices ticked up as the war in the Gulf dragged on with limited signs of a settlement. This issue clearly retains the ability to threaten the generally positive outlook for investment markets, but our central case remains that eventually the physical and political costs of continuing will force some kind of messy compromise which restores supply.

Looking forward, the traditional end to an equity market upcycle often comes when rising borrowing costs first slow, then reverse economic growth, sending stocks lower as investors factor in a future recession. However, that certainly does not appear to be the case at this particular point in time. The global economy seems more than able to absorb the various hits it is taking without going into reverse. This is one of the major reasons why our core expectation remains that the overall market outlook is one where returns moderate but remain broadly positive. The bond market moves to price money at more ‘normal’ rates can be dramatic and occasionally painful, but the trend is also something which eventually should turn out to be a good thing over the long run.