21 September 2026
Key takeaways
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The Bank of England kept rates steady last week, but investors are already looking beyond that decision. Markets are pricing in 1% of tightening over the next 12 months, despite a sluggish economy, suggesting inflation concerns remain centre stage.
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Fixed income markets are showing signs of nostalgia, with a return to an old regime. The US Treasury term premium – the extra compensation investors demand to hold longer-dated government debt – has recently moved above investment-grade credit spreads, a striking reversal from the pattern of the post-global financial crisis era.
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Europe’s AI ambitions and energy transition have something in common: they both need a lot more electricity – and a better grid to deliver it. That’s turning its ageing power networks into an infrastructure growth story.
Chart of the week – Bonds back to normal
The Federal Reserve raised rates by 0.25% last week, a move that matters less for its size than its message: after years of above-target inflation, the Fed is determined to take supply shocks seriously and protect its inflation-fighting credibility.
The backdrop is one of ‘a shock and a boom’. Energy and geopolitical supply shocks are pushing up inflation. But robust growth and a relatively solid labour market, supported by the tailwind of the AI boom, mean policymakers have room to lean against it. The catch is that the unbalanced nature of growth, combined with the potential for supply-driven inflation to squeeze real incomes and company profits, means policy tightening could have unintended negative consequences. This creates a spikier and higher profile for inflation, meaning that interest rates are set to be higher for longer, with no explicit guarantee of what the Fed will do next.
For investors, the good news is that bonds have rapidly adjusted to this new world. Real yields have been driving bond markets recently, and the anchoring of inflation expectations should give long bonds stability. At 5%, US 10-year government bond yields are not extreme by historic standards and reflect a return to more normal levels. That means Treasuries can again provide meaningful income.
But it’s also the case that bonds may continue to be less reliable equity hedges. That makes “diversifying the diversifiers” increasingly important, with public and private credit, emerging markets and alternatives offering different sources of return, in many cases with less volatility.
Market Spotlight
Smaller bets on big tech
After a few years of outsized gains from a small group of AI-driven technology giants, the 10 largest companies in the S&P 500 now make up close to 40% of the index—its most concentrated level in decades. That means investors in broad market tracker funds may be taking a substantial, often unintended tilt towards a handful of mega-cap tech stocks. So how can you seek equity exposure without simply mirroring the index’s most crowded positions?
This is where quantitative investing can offer a different approach. Instead of letting market capitalisation set the weights, active quant strategies aim to spread risk more evenly across stocks, sectors and geographies, using systematic signals (such as valuation, quality and momentum) to target potential sources of return.
That doesn’t mean walking away from today’s winners. Quant portfolios can still hold the largest tech names – just without letting them dominate outcomes – while also identifying opportunities beyond the current leaders as market leadership broadens. The takeaway: you don’t need to time when concentration unwinds. A more balanced, systematic approach can help prepare for it.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, 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. 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, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 18 September 2026.
Lens on…
Gilt trip
The Bank of England kept rates steady last week, but investors are already looking beyond that decision. Markets are pricing in 1% of tightening over the next 12 months, despite a sluggish economy, suggesting inflation concerns remain centre stage. Given the UK economy’s sensitivity to high oil prices, the recent surge in Brent crude above USD 100/barrel has been a key catalyst for higher Gilt yields. Rising oil prices can quickly feed into inflation and were widely blamed for driving a pick-up in CPI inflation during August. Meanwhile, another risk at the long end is that Gilts could rebuild a fiscal premium ahead of October’s Budget, particularly as high borrowing costs and weak growth constrain the government’s room for manoeuvre. That leaves the BoE with an awkward balancing act. |
The question is whether inflation pressures prove persistent enough to keep policy expectations elevated. A sustained fall in oil prices could ease expectations and support Gilts; but continued fiscal pressure could do the opposite, particularly at the long end of the curve.
Back to the future?
Fixed income markets are showing signs of nostalgia, with a return to an old regime. The US Treasury term premium – the extra compensation investors demand to hold longer-dated government debt – has recently moved above investment-grade credit spreads, a striking reversal from the pattern of the post-global financial crisis era. This isn’t unprecedented. In the 1990s and early 2000s, term premiums were regularly higher than credit spreads. That relationship flipped after the financial crisis, as concerns about sovereign duration faded while corporate credit risk became the bigger source of compensation. So, what’s changed? Markets appear increasingly comfortable with corporate credit, supported by strong profits, fortress balance sheets, and demand for alternatives to government bonds. At the same time, persistent fiscal borrowing is making investors more wary of long-duration sovereign debt, which is pushing up the term premium. |
The key question is whether this is a temporary pricing anomaly or a case of “back to the future”. If fiscal pressure keeps the long end under strain, the latter could have important implications for fixed income portfolios.
Europe powers up
Europe’s AI ambitions and energy transition have something in common: they both need a lot more electricity – and a better grid to deliver it. That’s turning its ageing power networks into an infrastructure growth story. More than 40% of Europe’s distribution infrastructure is over 40 years old, with grid bottlenecks forcing operators to switch off or scale back wind and solar power generation. Meanwhile, data-centre electricity consumption is expected to rise sharply by 2030, making grid availability a crucial factor in where Europe’s AI infrastructure gets built. The European Commission reckons EUR5.4trn of additional investment will be needed between 2025 and 2031 to meet climate and connectivity goals, with electricity grids accounting for much of it. But higher spending can mean higher energy bills, so governments and regulators also need to balance affordability with the returns needed to attract private capital. |
For investors, the outlook for European electricity transmission looks encouraging. Some infrastructure specialists believe that the scale of capital needed could be transformative for the investment proposition of European infrastructure companies.
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 18 September 2026.
Key Events and Data Releases
Last week
This week
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 18 September 2026.
Market review
Global equities were range-bound last week as global government bond yields and oil prices retreated from their highs. Market attention focused on central bank policy decisions, including the US Fed’s hawkish 0.25% hike, with most committee members expecting rates to rise at least once more by the end of 2026. The US Treasury yield curve flattened, and 10-year US Treasury yields briefly exceeded 5% but were on course to end the week lower. Other major sovereign yields also declined, most notably gilt yields. Oil prices pared early gains, although Brent and WTI crude remained above USD100 per barrel amid ongoing geopolitical tensions in west Asia. In equities, US stocks were mixed, with the tech-heavy Nasdaq modestly higher, while the FTSE 100 led gains across European markets. Asian equities lacked direction: the Nikkei 225 and the Shanghai Composite rose modestly, whereas the Kospi edged lower, alongside weaker Indian and ASEAN markets. In FX, the US dollar strengthened against its G7 peers.
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