By Josh Clayton, Assistant Portfolio Manager at Blackfinch
As at 1st September, 2026

Global bond markets came under renewed pressure last week as investors reassessed the outlook for inflation and interest rates.

Sovereign yields rose sharply across the US, UK, Europe and Japan. Reuters reported that the US 10-year Treasury yield reached around 4.8%, its highest level since early 2025, while Japan’s 10-year yield touched 3% for the first time since 1996.

Higher energy prices were a key driver. Brent crude moved back above $90 a barrel amid renewed tensions in the Middle East, bringing the risk of energy-led inflation back into focus. With underlying inflation also proving persistent in several major economies, investors increasingly questioned whether central banks may need to keep policy tighter for longer.

That shift in expectations weighed on equity markets, particularly in more rate-sensitive areas. Technology was one notable exception, supported by strong Nvidia results and guidance that reinforced confidence in continued demand for artificial intelligence infrastructure.  

UK Consumers Remain Cautious

In the UK, the latest data pointed to continued pressure on consumer activity.

The Confederation of British Industry Distributive Trades Survey showed retail sales volumes falling sharply in August, with the balance dropping to -48% from -26% in July. Retailers expect sales to remain weak in September, although at a slower pace of decline.

The CBI also highlighted continued caution among businesses. Weak demand is weighing on sentiment, while retailers still expect to reduce investment over the coming year.

At the same time, UK gilts were caught up in the broader global bond sell-off. Concerns around inflation, fiscal policy and the future path of interest rates pushed government borrowing costs higher, adding another layer of complexity to the domestic outlook.

US Inflation Keeps the Fed in Focus

In the US, attention remained firmly on the Federal Reserve (Fed).

Fed Chair Kevin Warsh struck a hawkish tone at Jackson Hole, arguing that the economy remains resilient while inflation has not improved sufficiently for the Fed to declare victory. Markets subsequently increased expectations for another rate rise, pushing shorter-dated Treasury yields higher.

The inflation data added weight to those concerns. The US Bureau of Economic Analysis reported headline Personal Consumption Expenditures (PCE) inflation of 3.7% year-on-year in July, while core PCE remained elevated at 3.3%.

There were, however, signs that parts of the consumer economy are beginning to soften. Consumer spending rose just 0.2% over the month, while real spending was broadly unchanged.

This leaves the Fed balancing two competing pressures: inflation remains above target, but momentum in parts of the economy is beginning to ease.

Attention now turns to the US labour market, where upcoming employment data are likely to play an important role in determining whether the Fed follows through with further tightening in September.

Europe Shows Further Signs of Recovery

The economic picture in Europe continued to improve, although inflation remained uneven across the region.

The European Commission’s Economic Sentiment Indicator rose to 98.4 in August from 97.1, marking its fourth consecutive monthly improvement and bringing it close to its long-term average.

Germany also offered further signs of recovery. Destatis revised second-quarter Gross Domestic Product (GDP) growth higher to 0.3% quarter-on-quarter, while the ifo Business Climate Index rose to 88.8 from 86.7. Companies reported both improving current conditions and greater optimism about the outlook.

Inflation, however, remains less consistent. INSEE estimated that French inflation rose to 2.4% in August from 2.1%, while Spain’s INE reported inflation accelerating sharply to 4.3% from 3.6%, largely reflecting higher energy costs.

The combination of improving activity and persistent inflation has helped push European government bond yields higher, keeping pressure on the European Central Bank ahead of its next policy decision.

Asia Balances Growth and Price Pressures 

China’s recovery remains uneven, although there were some encouraging signs beneath the headline numbers.

The National Bureau of Statistics reported industrial profits rising 11.2% year-on-year in July, although the pace of growth slowed for a third consecutive month. Across the first seven months of the year, profits were still 17.6% higher than a year earlier.

The composition of that growth remains important. The National Bureau of Statistics highlighted rapid profit growth across electronics and AI-related industries, supported by rising demand for computing infrastructure, while more domestically exposed areas continued to struggle.

More recent manufacturing data also offered some encouragement, with China’s August Manufacturing Purchasing Managers’ Index rising to 51.5, supported by stronger new orders and export demand.

In Japan, inflation pressures continued to build. Tokyo core Consumer Price Index inflation rose to 1.8% year-on-year in August, while the measure excluding fresh food and energy reached 2.0%, strengthening expectations for another Bank of Japan rate rise.

The Bank of Japan’s Services Producer Price Index also showed services inflation accelerating to 3.6% in July from 3.4% in June, suggesting that domestic price pressures are becoming more firmly embedded.

Alongside concerns around Japan’s fiscal outlook, these inflation pressures contributed to a sharp move in bond markets, with the 10-year Japanese government bond yield reaching 3% for the first time since 1996.

A More Demanding Backdrop for Investors 

Last week showed how quickly market expectations can shift when inflation risks re-emerge.

Higher energy prices, firmer inflation data and more hawkish central bank messaging all contributed to rising bond yields. At the same time, there were still signs of resilience, from improving European sentiment to stronger Chinese manufacturing data and continued momentum in AI-related sectors.

For investors, that creates a more demanding environment. Markets are adjusting to the possibility that interest rates may remain higher for longer, while growth and inflation are moving at different speeds across regions.

At Blackfinch, we believe this reinforces the importance of staying responsive as conditions evolve, while keeping portfolios grounded in diversification, active oversight and long-term objectives.

The backdrop may continue to change, but maintaining perspective can help investors adapt to those shifts and remain focused on the opportunities that may emerge over time. 

Sources: Bloomberg, Reuters, Yahoo Finance, The Guardian, Proactive Investors, BBC, Oxford Economics, FactSet 

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