The bond market remains at the centre of discussions.
The US 10-year bond closed last week at 5.28% after touching 5.34%, the highest since 2002, despite a soft payrolls print that effectively took an October US Federal Reserve hike off the table.
The takeaway is that the long end of the yield curve is no longer pricing the policy path, but it is pricing term premium – compensation for uncertainty over the Fed policy direction, the Iran conflict and energy.
On the latter, Brent crude held above US$100/bbl despite flows recovering and a further release of strategic reserves, with tightness migrating to refined products and a geopolitical premium that physical supply alone cannot unwind.
In contrast, iron ore hit 52-week lows.
In Australia, the RBA delivered its fourth hike of the year to 4.6% (the highest since 2011) but a softer inflation print has reduced the odds of another rate hike in November, and the consumer is visibly slowing.
Equities have so far looked through all this on the strength of corporate earnings; the upcoming US reporting season will test whether this holds.
The S&P 500 was off slightly (-0.3%), the Nasdaq gained 0.5% and the S&P/ASX 300 finished +0.1%.
Investors in Australia were quick to buy consumer discretionary on a potential pause in the rates hiking cycle.
Tech also had its best week since August (+6.8%) driven by stock specific upgrades.
US bond yields
US 10-year bond yields last week hit their highest point since 2002, piercing through both the 2007 and 2023 peaks.
We touched on the key drivers last week – the shift in Fed rhetoric, the energy shock, strong nominal economic growth and competition for capital from AI-related issuance.
There are two additional points to highlight this week:
First, the composition of the move:
- Friday’s softer payrolls report effectively removed the prospect of an October Fed hike, yet the 10-year yield still rose.
- This suggests long-end yields are no longer rising because investors expect the Fed to do more, but rather despite expectations that the Fed will do less.
- This means the market is increasingly demanding additional compensation for holding duration, reflecting uncertainty around inflation, energy prices, fiscal deficits, geopolitical risks and the future path of monetary policy.
Second, the shape of the curve is notable:
- During previous periods when the US 10-year traded around 5%, the Fed funds rate sat above the 10-year yield and the yield curve was inverted.
- Today, the Fed funds rate (3.75-4%) remains below long-dated Treasury yields, with the curve positively sloped and the 30-year Treasury yielding around 5.6%.
- This means the market is repricing long-term risks independently of the Federal Reserve, with investors demanding higher yields to hold long-duration assets.
Investor demand for duration remains another important question. For example, Goldman Sachs is posing the view that the buyer base for long-dated bonds may have structurally changed over the past decade.
Historically, higher yields would typically attract demand from relatively price-insensitive buyers, including insurers matching long-dated liabilities, sovereign reserve managers recycling trade surpluses into Treasuries and leveraged investors able to earn the carry trade through repo markets.
Goldman argues each of these buyer cohorts may be less important today.
Ageing populations are moving from accumulation to drawdown, reserve managers have increasingly diversified into assets such as gold, while leveraged investors have little incentive to add duration with carry compressed and recent bond-market losses still fresh.
If that assessment is correct, the marginal buyer increasingly becomes the unlevered household sector, which may require materially higher yields before stepping in.
While difficult to quantify, it provides one explanation for why yields have continued to rise despite reaching levels that historically would have attracted stronger demand.
The consequence is that bonds are increasingly behaving like a momentum asset rather than a traditional safe haven, in that rising yields are triggering further selling from systematic investors, hedge adjustment activity and reduced duration across portfolios.
While this dynamic can reverse sharply once buyers return, the catalyst remains unclear.
A meaningful de-escalation in the Middle East, a sustained decline in energy prices or greater certainty around the Fed’s reaction function could all provide relief, but none appear imminent.
For equities, higher yields have so far been offset by resilient earnings and ongoing economic growth.
The key issue from here is not simply the level of yields but the reason they are rising; equity markets can generally tolerate higher rates when they reflect stronger growth expectations, but they struggle more when yields continue rising despite evidence that growth is slowing.
With US reporting season commencing shortly, investors will be watching closely to see whether earnings remain strong enough to justify current valuations against an increasingly challenging bond market backdrop.
Positioning remains surprisingly cautious – Goldman Sachs estimates US hedge fund net exposure has fallen to its lowest level since April 2025 and is close to five-year lows, despite major equity indices trading near record highs.
Investor reluctance to add risk reflects ongoing concerns around oil, interest rates and geopolitics.
Notably, Russell 2000 positioning remains extremely depressed, with systematic exposure near the 7th percentile and leveraged funds carrying record short exposure, suggesting significant short-covering potential should yields stabilise.
Conversely, healthcare experienced significant short covering during the week, while energy remains heavily under-owned despite oil prices remaining above US$100/bbl.
US macro and policy
Data released on Friday suggests a labour market which is stable with softer payrolls, a slightly higher unemployment rate (+3 basis points to 4.18%) and muted wages (average hourly earnings +0.1% month/month and +3% year/year) not indicative of an economy which is overheating.
Payrolls increased by 29,000 in September (versus consensus at +90,000) with -60,000 revisions to the prior two months.
As a result, monthly gains averaged just 51,000 in Q3, down from 81,000 in Q2.
A pause at the Fed’s October meeting, signalled by Federal Reserve Vice Chair Philip Jefferson and New York Fed President John Williams before the employment report, looks very likely with the market only pricing a 22% chance of a hike.
Beyond payrolls, other US data was broadly consistent with a gradual cooling rather than a sharp slowdown.
- Weekly jobless claims remained near cycle lows, suggesting employers continue to hoard labour despite tighter financial conditions.
- Personal consumption expenditures (PCE) inflation was broadly in line with expectations and revisions were marginally dovish.
- Manufacturing surveys continued to point to ongoing cost pressures, reinforcing the view that while the labour market is easing, inflation risks have not fully disappeared.
This combination helped remove expectations of an October Fed hike, although longer-dated Treasury yields continued to rise as investors focused on inflation, fiscal and geopolitical risks rather than near-term monetary policy.
Oil
Brent crude finished the week at $102/bbl despite data showing Middle Eastern crude exports recovering to ~95-98% of pre-war levels, in addition to the US announcing a 40 million barrel strategic reserve release.
The resilience in prices suggests factors beyond physical crude availability are driving the market.
First, markets continue to assign a significant geopolitical risk premium to oil.
- While flows through the Strait of Hormuz have largely normalised, investors remain concerned that if Iran cannot materially disrupt tanker traffic it could instead target ports, pipelines or energy infrastructure, leading to a more severe supply shock.
- This risk premium was reinforced during the week by reports the US was considering deploying additional naval assets and troops to the region.
Second, investors increasingly view energy as an inflation hedge as bond yields continue to move higher.
- Higher oil prices contribute to inflation concerns, while inflation concerns support demand for energy exposure, creating a somewhat self-reinforcing dynamic.
The market’s focus has also shifted from crude to refined products. While crude exports have largely recovered, diesel and other product markets remain tight due to ongoing logistical disruption, constrained Middle Eastern product exports, Russian export restrictions and lower Chinese product exports.
As a result, refining margins remain elevated even as crude flows improve.
The release of 100 million barrels from G7 strategic reserves (split between half crude and half diesel) helps – as well as confirmation by Trump that a US export ban is off the table – but does not fully address the issue.
For context, a 50 million barrel release over four months is roughly equivalent to 416,000 barrels per day – versus a ~1.6 million barrel/day disruption to diesel from disruption in the Middle East and Russia, in a 30 million barrel/day diesel market.
The key question from here is what breaks the cycle.
A return to negotiations and continued recovery in Middle Eastern exports could gradually unwind the geopolitical premium and allow inventories to rebuild at lower prices.
Conversely, any escalation in the conflict or disruption to infrastructure could see the current risk premium persist, with inventories needing to be rebuilt at materially higher prices.
Iron ore
Iron ore fell to a 52-week low of US$92.1/t, with Chinese demand seasonally soft during the Golden Week holiday period (through to 7th October).
Free on board (FOB) prices – which reflect production, shipping to port and loading onto the ship – have declined to approximately US$75/t in Australia (-16% since February) and US$48/t in Brazil (-35% since February), while freight costs briefly reached US$43/t last week.
Early signs of supply discipline are beginning to emerge, with three Brazilian producers announcing output curtailments over the past month.
Given the steep and highly elastic iron ore cost curve, lower prices are likely to drive a market rebalancing over time.
Australian producers remain among the lowest-cost suppliers globally, but investor sentiment has deteriorated, with short interest in both Fortescue (FMG) and Rio Tinto (RIO) reaching one-year highs as the earnings impact of lower prices is yet to fully flow through.
Ongoing discussions with China’s centralised unit buying on behalf of steel mills – China Mineral Resources Group (CMRG) – add to uncertainty by creating product placement and demand risks across the sector.
Australia macro and policy
The RBA raised the cash rate by 25bps to 4.60%, marking its fourth rate increase of 2026 and taking the cash rate to its highest level since 2011.
The decision was unanimous and reflected the Board’s continued concern that inflation remains above target despite signs that household demand is slowing.
Consumer spending softened further through September as households continued to reallocate spending away from discretionary categories and toward essentials.
Higher fuel prices, rising utility bills and elevated mortgage repayments are increasingly absorbing household budgets, with spending holding up in fuel, pharmacy, groceries and travel, while household goods, fashion, dining out and recreation remain softer.
The latest rate increase is likely to reinforce these trends heading into the important Christmas trading period.
Inflation data released during the week was modestly softer than expected, with August trimmed mean CPI rising 0.24% month/month versus market expectations of 0.3%.
The result provided the RBA with some breathing room and saw markets significantly reduce expectations of a follow-up rate hike at the November meeting.
Despite the softer inflation print, several near-term inflation risks remain.
Rising oil and diesel prices continue to place upward pressure on transport, logistics and household fuel costs, while the removal of payment surcharges from 1st October has prompted a wave of announced price increases across parts of the consumer and service sectors as businesses seek to recover those costs through headline pricing.
As a result, while demand conditions are weakening, inflation is likely to remain uneven across the economy.
The key question for markets is whether slowing consumption and a weaker consumer ultimately outweigh these cost pressures – if spending continues to deteriorate and inflation moderates further, the RBA may be able to leave rates unchanged.
However, sustained energy price inflation and ongoing cost pass-through from businesses could slow the disinflation process and delay any future policy easing.
Markets
In Australia we saw strength in technology (+3.5%), consumer discretionary (+2.6%) and communication services (+1.8%), while healthcare (-1.4%) and energy (-1.1%) underperformed.
Stocks were driven by changing expectations for the rate hiking cycle, M&A activity and the occasional upgrade last week.
IMPORTANT INFORMATION: This document has been prepared by Enhance Financial Partners, ABN 45 146 707 173 AFSL 515518, based on our understanding of the relevant legislation at the time of writing. While every care has been taken, Enhance Financial Partners makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.