Bond yields moved higher in August as markets reassessed the outlook for growth, inflation and borrowing. The shift has increased pressure on fixed-income assets and strengthened the case for a cautious approach to bonds while economic activity remains resilient.
Global growth has held up better than expected. Consumer spending remains firm, fiscal support is still feeding through into activity and investment in artificial intelligence continues at scale. These factors reduce the likelihood of rapid interest-rate cuts and make it harder for bond yields to fall sustainably.
Energy prices are adding to the pressure. Higher costs linked to tensions involving the US and Iran have increased inflation risk, even though equity markets have so far absorbed the impact relatively well. Bond markets are more exposed to the possibility that stronger energy prices could keep inflation elevated and delay monetary easing.
Inflation remains a central issue. US inflation has stayed above the Federal Reserve’s 2% target since March 2021, and markets are increasingly pricing in the possibility that it will remain higher for longer. That keeps upward pressure on yields and limits the near-term appeal of longer-duration government bonds.
AI investment is also becoming more relevant to debt markets. Spending on AI infrastructure is running at around $1 trillion this year, with a growing share funded through borrowing. Increased debt issuance means more supply for markets to absorb, which can push yields higher. The scale of AI investment is therefore affecting both equity markets and the cost of capital.
Public debt remains high across developed markets and there is limited evidence of major spending restraint. This has not been the main driver of the recent rise in yields, but it increases the risk premium attached to government debt and could keep borrowing costs elevated over time.
Efforts to bring down long-term yields have had limited impact. US Treasury Secretary Scott Bessent attempted to reduce longer-dated borrowing costs by buying 30-year bonds using proceeds from shorter-term issuance. The initial market reaction faded because the underlying pressures on yields remained in place.
Arbuthnot Latham therefore remains underweight government and corporate bonds in client portfolios. The current view is that yields are unlikely to fall significantly while growth stays firm. A clear slowdown in economic activity would change that assessment and could create a stronger case for increasing bond exposure.
Equity markets are showing a different pattern. The AI theme remains strong, but leadership is broadening beyond semiconductor companies. Chipmakers recovered during August after earlier weakness, while software businesses began to attract more attention.
Software shares had struggled during the first half of the year because of concerns that generative AI could weaken established business models. More recent earnings have started to challenge that view. Some software companies are showing that they can monetise AI products, while businesses are also finding that replacing established systems with internally developed AI tools is more difficult than expected.
Arbuthnot Banking Group PLC (LON:ARBB), operating as Arbuthnot Latham, offers private and commercial banking products and services in the United Kingdom. Established in 1833, Arbuthnot Banking is headquartered in London, United Kingdom.
