Summary
•Long-duration government bonds were August’s focal point. The 30-year U.S. Treasury yield reached 5.31% on August 18, its highest level since June 2007, while long-dated sovereign yields rose across other major developed markets. Japan’s 10-year government-bond yield moved above 3% for the first time since 1996.
• Equities remained resilient despite the rise in rates. The S&P 500 returned 2.7% for the month, reached a record intra-month close near 8,000, and ended August at 7,686.
•Credit markets remained notably sanguine. Spreads stayed near multidecade tights even as government borrowing costs increased, leaving relatively little margin for disappointment should growth, inflation, or liquidity conditions deteriorate.
•Monetary-policy expectations turned more hawkish. Chair Kevin Warsh used his Jackson Hole remarks to emphasize the Federal Reserve’s commitment to its 2% inflation objective, and fed-funds futures ended the month, assigning roughly two-thirds odds to a September rate increase.
Market Recap
August was a month in which the stock market and the bond market appeared to be looking at two different economies. Equities climbed to records, credit spreads held near multi-decade tights, and second-quarter earnings delivered the strongest growth since 2021. All of that would point to a healthy, ongoing expansion. Meanwhile, the long end of nearly every major sovereign curve sold off to levels not seen in a generation. Alongside this move in rates, gold rebounded roughly 10% amid headlines of the U.S. federal debt surpassing $40 trillion.
The headline equity numbers were constructive. The S&P 500 returned 2.7% in August, its first monthly gain since May. In the U.S., growth stocks (Russell 1000 Growth Index) outperformed value stocks (Russell 1000 Value Index) (3.7% vs 2.0%, respectively). The NASDAQ Composite recovered most of what it surrendered during July’s technology/momentum unwind. Leadership rotated underneath the surface, with financials and energy participating mid-month and mega-cap technology taking over at the end.
The June memorandum of understanding between the U.S. and Iran on the Strait of Hormuz expired on August 17 without an extension, and by the end of the month, the two countries had exchanged strikes for the first time in roughly a month. Brent rose back over $90/barrel after having fallen into the low-$70s earlier in the summer. Transit volumes through the Strait remain a fraction of pre-conflict levels. Gold gained roughly 10%, its best month since January, and continues to rebound from its Q2 weakness to finish near $4,460, though it remains roughly 15% below its January peak of $5,318. A 10% rise in gold alongside rising real yields is unusual. Our take is that the market is reacting to potential U.S. dollar weakness rather than solely a rate trade.
The Long End
On August 18, the 30-year U.S. Treasury yield hit 5.31%, its highest level since June 2007. It is a 19-year high in the price of long-dated government money. It hit this as the nonfarm payroll report early in the month showed that employers unexpectedly shed 23,000 jobs, and inflation figures largely landed as expected. But the rise wasn’t contained to just the U.S. Treasury market—yields in developed countries around the world are following the same path.
Rising yields have been a global phenomenon. 10-year JGB yields crossed 3% for the first time since 1996, German Bunds reached their highest since 2011, the 30-year U.K. gilt is approaching 6.0%, and 30-year French OATs hit a post-GFC high. When every developed sovereign curve steepens at the long end in the same month, the explanation is not one country’s policy error. It is more a global repricing of what it costs a government to borrow for thirty years in a world with more debt, more inflation risk, and fewer price-insensitive buyers.
A New Chair, and a New Reaction Function
As we noted in our second quarter commentary, the most consequential institutional development of 2026 has been the change at the Federal Reserve, and August confirmed it. The July FOMC meeting held the target range at 3.50% to 3.75% for a fifth straight time, but on a 9-3 vote that saw Governors Hammack, Kashkari, and Logan dissent in favor of a hike.
Fed Chair Warsh then used his August 28 Jackson Hole speech to say that the summer’s better inflation reports do not tell him that underlying trends have meaningfully improved, and to restate the 2% inflation objective as a firm and fixed target after months of speculation that he might change the gauge. He also said that he would be hard-pressed to describe financial conditions as restrictive. September hike odds moved from closer to 30% around mid-August to about 58% immediately after the speech. The odds of a hike finished the month near two- thirds.
Equity Markets
Second quarter corporate earnings were extraordinary. FactSet shows blended second-quarter S&P 500 earnings growth came in at 52%, the highest rate in five years. Even excluding large, one-time equity gains from Alphabet and Amazon, earnings grew at a very robust 31.8%. Revenue grew about 15%, with every sector posting positive top-line growth. The AI bellwether, NVIDIA, reported quarterly results in late August and delivered $96.2 billion in revenue, up 106% year-over-year. The beat was largely from the data center segment, which posted revenues of $89 billion. The extraordinary growth continues for those companies participating in the AI buildout. Whatever one concludes about valuation, the earnings underneath the theme remain remarkable.
Equity returns overseas were largely in line with domestic returns. The MSCI ACWI ex-US Index returned 2.6%. European markets were the relative laggard at 1.42%, while Japan and emerging markets had similar returns over the full month. A weaker U.S. dollar over the course of August contributed to better returns for unhedged investors.
Investment Implications and Outlook
We made no strategic asset-allocation changes during August. We remain overweight U.S. equities, with an emphasis on small- and mid-cap companies.
Within fixed income, we continue to maintain duration below that of the Bloomberg U.S. Aggregate Bond Index. This positioning reflects the asymmetric risk associated with a further rise in long-term yields amid persistent fiscal supply, inflation uncertainty, and evolving monetary-policy expectations.
Tight credit spreads argue for discipline in lower-quality credit exposure, but healthy corporate fundamentals continue to support an emphasis on income and security selection rather than a broad reduction in credit risk. We will monitor whether the divergence between resilient risk assets and a weakening long-duration bond market resolves through lower yields, more moderate equity valuations, wider spreads, or some combination of all three.
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