Long-term rates take center stage again: Government debt comes under pressure while equities hold firm
August has shifted the focus of the markets. While in recent months attention had been focused almost entirely on the Federal Reserve and the future path of interest rates, this time the spotlight has moved to the long end of the curve.
Long-term government bond yields have surged to multi-decade highs in the United States, the United Kingdom, Germany and Japan. Investors are beginning to demand greater compensation for holding long-term debt, against a backdrop of high public deficits, growing financing needs and an ever-increasing volume of corporate issuance linked to artificial intelligence.
Despite this, August has generally been a good month for risk assets: equities have held up, supported by a strong earnings season, while gold, precious metals and bitcoin have “come back to life,” recovering some of the ground lost in previous months.
United States: the Treasury steps in to rein in bonds, the dollar and the yen
If anything has defined the United States this month, it has been the intervention of Scott Bessent and the Treasury in an attempt to halt the decline in long-term bond prices. After a rise that took the 30-year bond yield close to 5.3%, its highest level since 2007, the Treasury announced that it would double the amount of its long-term debt buybacks, with the aim of providing some relief to an increasingly strained market. The relief was short-lived: just a few days later, bonds had returned to levels similar to those seen before the announcement, prompting the Treasury Secretary himself to publicly commit to even larger buybacks in the following weeks.
This intervention has had a significant side effect: the dollar has weakened sharply, hit by the perception that Washington is pushing down the price of long-term money through the back door. This move has boosted gold, silver and bitcoin, increasingly seen as safe havens amid a loss of confidence in the dollar.
On the geopolitical front, the month has been marked by the escalation with Iran. After the 60-day deadline set in June to reach an agreement expired, the Trump Administration chose to step up the pressure: Bessent announced what he himself has dubbed the “economic D-Day” against Iran, a package of sanctions aimed at strangling the country’s oil exports and pursuing those who help it evade them.
This has been compounded by the unusual joint intervention by the United States and Japan in early August to stem the yen’s weakness, after it had fallen to four-decade lows against the dollar. It was the first coordinated action of this kind since 2011 and temporarily enabled the Japanese currency to recover some ground.
In this environment, the U.S. stock market maintained a positive tone for much of the month. Both the S&P 500 and the Nasdaq reached new all-time highs in mid-August, although momentum moderated in the second half of the month. As a result, the S&P 500 ended August up around 2.6%, while the Nasdaq gained 4.8%.
At the end of August, Nvidia reported its quarterly results in one of the most anticipated events of the month. The company once again beat expectations, with very strong results and forecasts confirming the strong momentum in artificial intelligence investment. The market’s initial reaction was clearly positive, with the stock rising by more than 7% in the hours following the announcement.
On inflation, July’s CPI eased slightly to 3.4% year-on-year, from 3.5% in June, while core inflation fell from 2.6% to 2.5%. Meanwhile, the Fed’s message at Jackson Hole remained hawkish, highlighting the persistence of inflationary pressures and tempering expectations of rate cuts.
Europe: the DAX hits record highs as inflation picks up
Eurozone inflation rose in July to 2.9% year-on-year, from 2.8% in June, although the core rate eased slightly, from 2.6% to 2.5%. The increase in the headline figure is explained mainly by energy, while the core reading suggests that underlying pressures, although still persistent, are not accelerating.
August was a positive month for European equities, with the DAX as the main protagonist, although the final sessions were marked by a sharp correction in the index. The rest of the major European indices also remain clearly positive for the year, although the market ended the month on a weaker note after the final week. In this context, MSCI Europe gained 0.3%, while the Eurostoxx 50 rose 1.0%.
Meanwhile, the European Commission approved a new €6.1 billion aid package to strengthen Ukraine’s defence. This news accompanied the strong performance of the European defence sector this month, following a good earnings season. However, some profit-taking occurred during the final two weeks of August, causing a slight correction in the sector after the strong gains accumulated.
Asia: A month of contrasts between Japan, China and appetite for artificial intelligence
Japan experienced one of the most volatile months of the year, with the TOPIX alternating between record highs in mid-August and its largest daily decline since March. Elsewhere in the region, performance was more stable, although slightly negative: both MSCI China and MSCI India fell 0.4% over the month.
The most striking episode was the Shanghai stock market debut of humanoid robot manufacturer Unitree Robotics, which soared 460% in its first trading session, the latest sign of investor enthusiasm for “embodied AI.”
Portfolio implications
After such a strong earnings season in the United States, we remain optimistic on U.S. equities. Although we do not rule out some volatility in the coming months as we approach the November elections, we maintain a constructive underlying stance. Looking ahead to September, the market will watch whether upcoming inflation and employment data confirm the Fed’s pause, and whether the U.S. Treasury can, through its debt buybacks, contain pressure on the long end of the curve.
The decision to increase the weighting of equities in portfolios, with particular emphasis on the technology sector, is proving to be the right one: the Nasdaq’s strong appreciation, which once again reached all-time highs in August, has allowed us to capture a large part of this rebound and strengthen the sector’s contribution to this year’s performance. We remain comfortable maintaining the exposure, supported by earnings that continue to be strong, although with active diversification management.
In currencies, the decision to keep the portfolio hedged against the dollar is also proving rewarding: the euro has gained ground notably again this month, in a context in which the U.S. Treasury’s own intervention at the long end of the curve has contributed to weakening the currency.