ˮ����AV

14 September 2026

Something doesn’t quite add up in bond markets. G7 government bond yields have risen sharply of late, particularly at the long end, yet corporate credit spreads have barely budged. Where has the usual credit transmission gone?

An important point about the recent rise in yields is that, so far, it’s been mainly driven by higher real yields and term premia, rather than a big shift in inflation expectations. Normally, higher risk-free rates feed into tighter financial conditions, raising refinancing costs for firms and, eventually, leading to more downgrades and defaults. That should mean wider credit spreads. Yet US investment-grade spreads remain around 0.80%, and high yield spreads are also relatively tight, suggesting investors are demanding relatively little compensation for corporate credit risk.

There are a few possible explanations. First, the transmission may just be taking its time. Many companies locked in cheap funding before yields rose, meaning the refinancing wall has yet to bite. Downgrades, defaults, and interest coverage will be worth watching for signs that’s changing. Second, corporate fundamentals remain in decent shape, and record profits can offset higher yields. Financially fit balance sheets help justify tight spreads, even if government finances look less comfortable. Third, there is possibility that credit spreads have become too tight as investors increasingly look for ways to “diversify the diversifiers”, allocating out of bonds and into credit. Strong fund flows themselves could be suppressing spreads relative to the underlying risk.

For now, the question is whether tight spreads are a sign of resilience or complacency. If higher yields eventually weaken corporate fundamentals, credit could start to feel the pressure. But if the bond sell-off is mainly a repricing of sovereign term premia, credit may have less reason to follow. 

Globally, 2026 is shaping up as a bumper year for new company listings (IPOs), with high-profile US listings grabbing headlines. But a key subplot is emerging markets’ growing role in the innovation pipeline.

Mainland China raised more IPO capital than any other region in Q1, with AI-related companies alone bringing in around USD22bn. Hong Kong, meanwhile, has a record pipeline of 400+ prospective listings, many tied to AI, semiconductors, robotics and medtech. Elsewhere, fintech unicorns are lining up in parts of Africa and Latin America.

This flow of new listings is reshaping EM benchmarks. Where indices were once dominated by commodities, state-owned banks, and industrial cyclicals, innovative industries now account for close to 40% – more than double levels a decade ago. That matters because platform- and IP-led firms tend to bring different margin profiles and growth trajectories, making EM earnings potentially less hostage to commodity cycles and external demand.

Yet valuations haven’t fully caught up: EM still trades at an above-average discount to the US on common metrics. And while any re-rating won’t be immediate, selective exposure to higher-quality EM innovators could make longer-term sense.

This raises a central question: how has the economy continued to expand at a solid pace as household incomes have come under strain? The answer lies in a declining savings rate, which has helped sustain consumer spending. It also highlights key risks to the outlook. If profits keep rising at labour’s expense, household demand may eventually falter. Conversely, a sharper rebound in the labour market could squeeze margins unless firms pass through higher costs via price rises, potentially triggering a more restrictive Federal Reserve stance. Overall, the optimal path is a rebalancing of capex growth and a gradual recovery in household incomes that avoids materially compressing profits — or a productivity boom that supports both.

The key question is whether longer-term investors follow. Durable appreciation will require conviction that Japan has entered a genuinely different environment, rather than intervention or positioning alone. Relative US-Japan monetary policy will be crucial, but so will external fundamentals. Higher oil prices, for example, worsens Japan’s terms-of-trade given its dependence on energy imports, while the US is largely self-sufficient. Renewed BoJ disappointment or adverse terms-of-trade dynamics could therefore trigger some backward steps.

Risks remain – including volatile energy prices and geopolitical tensions. But improving profits, global revenue exposure, participation in the AI investment cycle, and comparatively modest valuations could make Europe a useful complement within a global equity portfolio.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 11 September 2026.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 11 September 2026.

Global equities came under pressure last week, with higher oil prices and rising G7 bond yields dominating attention. Renewed inflation worries pushed US Treasury yields higher ahead of this week’s Federal Reserve rate decision, with long-end yields rising despite Treasury Secretary Scott Bessent announcing USD6bn of bond buybacks. 10-year yields also rose notably in Germany and the UK, as the ECB delivered a 0.25% rate hike and revised its medium-term inflation forecasts higher. In Japan, JGB yields reversed their intraweek declines ahead of this week’s BoJ policy meeting. Equities weakened, with US and European exchanges on course to close the week lower. In Asia, the tech-heavy Kospi index was a rare gainer after losses in previous weeks, while major indices in Japan, mainland China, and India fell. The US dollar firmed against most major currencies.