Bond market review

Allianz Research | 1 September 2026

Ten top-of-mind questions on the bond market rout

In Summary Ludovic Subran The bond market dominates the financial news flow since summer. Here, we answer the ten Chief Investment Officer & Chief top-of-mind questions about the latest market trend: Economist 1. Is the bond market in panic mode? No. Sovereign yields rose since July, again reaching multi-year highs, but the speed of increase was lower (30-50bp) than after the start of the US- Ana Boata Head of Economic Research Iran war (50-90bp). Bond markets are still functioning well according to bid-ask spreads or auction demand, but elevated rate levels are rightfully raising debt sustainability concerns. Maxime Darmet 2. Have higher energy prices contributed to the recent sell-off? Yes. Renewed tensions in the Senior Economist US, UK, France Middle East since July and destructions of refining capacity in Russia have raised energy costs maxime.darmet@allianz- in particular gas prices again, leading to higher inflation and central bank expectations (Fed trade.com terminal rate +35bp, ECB +50bp) explaining the lion’s share of rate increases. Europe’s energy Pierpaolo Fiore dependence is back in focus, with inflation rising to 3.3% in August, above the May reading. Investment Strategist 3. Can we blame AI funding for the lack of demand in government bonds? Partially. Even though total net credit issuance, largely due to AI investment, rose from USD48bn ytd last year Bjoern Griesbach Head of Macroeconomic and to USD356bn ytd this year, equivalent to around half of US Treasuries' net supply of USD681bn Capital Markets Research ytd, stable swap spreads do not indicate strong crowding out lately. Structurally, credit spreads near decade-lows indicate that the supply imbalance has shifted against government bonds. 4. Will Treasury Secretary Scott Bessent's fiscal dominance attempts backfire? Yes if they Maddalena Martini Senior Economist for Southern intensify. Off-the-run bond buybacks or using excess cash to temporarily lower issuance are Europe accounting tricks that will not lead to lower debt issuance in the medium run. With an average debt maturity of just 5.9 years, the US remains highly exposed to refinancing conditions. Ultimately, only credible fiscal consolidation can ease pressure on yields. Dorian Simon Rates Strategist 5. Could the US mid-term elections improve the fiscal policy outlook? No. But despite the likely political deadlock, we expect Democrats and Republicans to find a compromise on a modest fiscal tightening (0.5–0.6% of GDP/year), which would halve the pace of debt Garance Tallon accumulation to +1pp of GDP/year through 2028, but would not stabilize the debt ratio. Economist for Asia-Pacific 6. Can Fed Chair Kevin Warsh calm the markets if bond markets go south? Yes, he has already done so in Jackson Hole, by re-affirming the Fed’s commitment to bring down inflation. Moreover, the Fed has unlimited firepower to purchase bonds to lower yields. But this would only happen if market functioning were at risk given Warsh’s reluctance to use QE. 7. The USD is down, Bitcoin and Gold are up – is the debasement trade back? Yes, but to a lesser extent than in 2025 following Liberation Day. After a war-driven reversal in H1 2026, the “hard” basket (precious metals) has outperformed the “soft” basket (govies, equity and inflation breakevens) by +15pps since July as concerns over the USD resurfaced. 8. Are European bonds suffering from rising political instability? Yes. Governments are perceived as less likely to deliver necessary but painful fiscal tightening ahead of upcoming elections amid a rise of populistic parties across the continent. France and Italy are the clearest pressure point with the OAT-Bund spread at 86bp with 100bp possible by year end. 9. What’s the role of Japan in all this? It adds to the turmoil as we expect the BoJ to hike by +75bp more by end-2027 (to 1.75%), encouraging Japanese capital repatriation. Japanese investors hold around USD1.1tn of US Treasuries, while France is also particularly exposed to foreign portfolio flows, with non-residents holding around 56% of its government debt. 10. Bond outlook…