September 2026

Rates rise, bonds pay and AI gives pause

September brought the first US rate rise in three years, government bond yields at levels not seen in decades, and an unusual call from inside the AI industry to slow down. Despite all that, stock markets ended the month close to record highs. Here's what happened, with insights from our partner fund managers.

Rates are rising again

The Bank of England held rates at 3.75% this month, but three members of its rate-setting committee voted for an immediate rise.¹ Governor Andrew Bailey has since warned that persistently high energy prices will make it harder to hold rates, and other committee members have signalled they are edging closer to a rise.² Markets now expect the Bank to raise rates four times by the end of next year.³ UK inflation rose to 3.1% in August, its highest level in five months.

The US Federal Reserve went further. It raised rates by 0.25% to a range of 3.75–4.00%, its first increase since 2023, and the decision was unanimous.¹ Markets now expect three to four further US rises over the next year.² The European Central Bank has raised rates twice this year, to 2.5%, and the Bank of Japan's policy rate is at a 31-year high.^{1 3}

The main driver is oil. Renewed fighting in the Middle East, including attacks on Saudi energy infrastructure, has pushed oil back above $100 a barrel.⁴ Nathan Sweeney at Marlborough points out that raising interest rates won't produce more oil. He suggests the Fed may also be acting to keep US government bonds attractive to overseas buyers, now that global investors have more alternatives.⁵ Talks on reopening the Strait of Hormuz continue, but no deal has been agreed and oil prices remain volatile, with Brent crude swinging either side of $100 a barrel.²

For savers, higher rates mean better returns on cash. For those with mortgages, in sterling or euros, they mean borrowing costs are unlikely to fall soon.

Bonds are paying again

The 10-year gilt yield has risen to around 5.4%, up almost a full percentage point this year.⁶ The 30-year gilt hit 5.9% earlier this month, a level not seen since 1998.⁷ In the US, the 10-year Treasury yield has broken decisively above 5% for the first time since 2007 and now stands at around 5.25%, while the 30-year yield has passed 5.5%, a level last seen in the early 2000s.²

Those numbers attract attention, but they need context. As Rhys Cann at LGT Wealth Management points out, the near-zero rates after 2008 were the exception, not the norm.⁸

Importantly, the rise isn't being driven by fears of higher inflation. Marlborough and Quilter Cheviot point to the same data: markets' expectations for US inflation over the next decade have barely moved, at around 2.3–2.4%. The increase has come instead from "real" yields, the return after inflation. At around 2.7–2.9%, these are at their highest since the financial crisis.^{9 6} That reflects an economy stronger than many expected. US business activity is at a 62-month high, and growth in the third quarter is tracking at around 4–5% a year.⁶ Put simply, government bonds are once again paying a meaningful return above inflation.

After years of near-zero rates, government bonds are once again paying a meaningful return above inflation.

Richard Carter at Quilter Cheviot notes that the rise in yields has been orderly. Even long-dated US government bonds were down only around 3% this year to the end of August. That's unwelcome, but modest compared with the falls equity markets can see.⁷ As Cann puts it, bonds do two jobs rather than one: they deliver a real return in their own right, and they act as ballast if equity markets struggle.⁸

AI: a month of mixed signals

The AI story started the month strongly. US company earnings rose around 33.5% year on year in the second quarter, the fastest growth since 2021, and 86% of companies beat analyst expectations.⁸ Nvidia once again reported better-than-expected results.⁷

Then, in mid-September, the heads of the world's leading AI companies called for a slowdown in the pace of development, citing safety concerns. More than 1,000 investors signed up for a single analyst call on the subject.³ Technology shares began the following week on the back foot,⁴ but by late September the S&P 500 and the tech-heavy Nasdaq had both touched fresh highs, led once again by AI enthusiasm.² Separately, the Chinese firm DeepSeek showed further efficiency gains, raising questions about how much computing power AI will ultimately need.⁵

Quilter Cheviot's view is that even if the development of new models slows, demand for running existing AI tools remains in short supply, so company revenues are unlikely to suffer much.⁴ Cann argues that the spending boom is backed by genuine demand, with advanced chips and data-centre capacity still tight. He does flag the risks: some deals are circular, including Nvidia lending money to companies so they can buy its chips, and markets are heavily concentrated. The Magnificent Seven now make up around 22% of global stock market indices.⁸ That means most UK investors in global funds have significant AI exposure, whether they chose it or not.

Many clients' concerns about AI go well beyond markets, to the pace of the technology itself and what it means for society. Those are reasonable questions, and not ones markets can answer. What we can say is that a portfolio shouldn't depend on any single theme continuing indefinitely.

Beyond the US

Diversification has proved its worth this year. European companies had a strong second-quarter earnings season, with 74% beating revenue forecasts, even though technology makes up only around 8% of the European market compared with 38% in the US.⁷ UK large and mid-sized companies are both up just over 10% this year, including dividends. In the US, value stocks have gained over 21%, though growth stocks have been catching up and are now up around 7%. Italian shares have been among the strongest performers, up 19% year to date.⁶

Looking ahead

UK Budget (October). Higher gilt yields have eaten into the roughly £24bn fiscal buffer left by the previous Chancellor. Tax rises appear to be the main option for Chancellor John Healey.⁷ We'll cover what it means for clients once the details are known.

US–China. Presidents Trump and Xi have agreed to extend their trade truce by two months, to January 2027.²

US midterms (3 November). A divided Congress is the widely expected outcome, which would limit the scope for major new US policy.

The bigger picture: what this means for investors

September has a history of financial crises. Larry Elliott in the Guardian points to Britain leaving the Gold Standard in 1931, the pound's exit from the ERM in 1992 and the collapse of Lehman Brothers in 2008, and argues markets now look as fragile as at any time since 2008.¹⁰ US shares also look expensive on the CAPE ratio, a long-term measure of valuations: at around 41, it's more than double its long-term average and not far off the record set just before the dotcom crash.³ Fathom Consulting puts a 30% chance on the AI bubble bursting next year.³

While these concerns warrant attention, even Elliott acknowledges important differences from 2008. That crisis came from banks overreaching to finance US property. Banks look far less exposed this time, and unlike pre-2008 housing, AI is likely to have a lasting positive economic impact.¹⁰ There are some signs of strain: the Bank of England notes investors have become warier of the riskiest debt since the Iran war began.³ But the rise in bond yields has been orderly,⁷ and today's market leaders are highly profitable businesses with strong balance sheets.⁸ AI is already lifting productivity; it's among the reasons the UK grew faster than any other G7 economy in the first half of the year. Former Bank of England chief economist Andy Haldane expects a slow release of air rather than a dotcom-style collapse.³ There are soft spots, including housing and consumer spending, but company profits and business investment are holding up. Historically, US recessions have come with weakness in both.⁸

None of this means markets won't fall. They will, from time to time. What matters is being prepared, and a few principles apply however the next few months unfold.

Review, don't react. Check that your allocation still matches your goals and timeframe. With bonds paying meaningful income again and markets beyond the US performing well, a diversified portfolio is better placed than it has been for years.

Remember why we advise you to keep enough liquidity. If you're drawing an income, hold enough in cash or short-dated bonds to cover your withdrawals, so you're never forced to sell investments after a fall and lock in losses.

See the opportunity. If you're still building wealth, a market fall is an opportunity. Regular contributions buy more units when prices are lower, and it's a chance to put any spare cash to work. Unit cost averaging will always pay off so long as you remain consistent and disciplined.

Stay unemotional. Eustace Santa Barbara at Marlborough tells the story of Elsie Sutherland, a retiree filmed by the BBC in 1988. She listened to a radio report of the FTSE 100 falling to 1,964.5 and declared she'd be bankrupt. In the end she lived to the grand old age of 103, by which time the index had passed 6,000. Today it's above 10,000.¹¹

Remember inflation. Daniel Casali at Evelyn Partners notes that global equities have delivered real returns of around 6% a year since 1994, well ahead of cash and government bonds.¹² Over time, the bigger risk is usually not being invested.

History doesn't repeat, but it does rhyme. Markets go through wars, rate rises and crises, and they have always recovered.