September's Bond Market Pressure: 2% Median Decline Driven by Supply, Uncertainty

Global long-term government bonds are under significant pressure as September approaches, with historical data indicating that this month has been the most challenging for these securities over the past decade. The median decline for 10-year and above government bonds in September has been 2%, marking it as the worst-performing month of the year. This trend is driven by a combination of factors, including increased bond supply, political uncertainties, and key economic data releases.

The primary pressure on long-term bonds comes from the anticipated increase in government debt. As governments worldwide ramp up fiscal spending, the supply of long-term bonds is expected to rise, eroding the yield advantage of shorter-term bonds. This shift is making long-term bonds less attractive to investors, who are now facing a more challenging environment.

Geopolitical tensions are further exacerbating market uncertainties. High inflation in Japan, political instability in France following the confidence vote on the Prime Minister, and the policy debates surrounding the U.S. presidential election are all contributing to a volatile market. If the Trump administration pressures the Federal Reserve to cut interest rates, it could exacerbate domestic price pressures, adding to the challenges faced by long-term bond investors.

Market sentiment has turned cautious, with September traditionally being a critical window for monetary policy shifts and market expectation resets. Institutional investors are adopting defensive strategies, focusing on two key risk events: the upcoming U.S. non-farm payroll data release, which will validate the Federal Reserve's rate cut expectations, and the eurozone inflation data, which could disrupt the European Central Bank's decision to maintain interest rates.

Strategists are also paying close attention to seasonal supply patterns. Research managers from Pepperstone Group and JPMorgan International have noted that the weak performance of long-term bonds in September is closely tied to the issuance schedule. Typically, bond issuance is lower in July and August, and again after mid-November, with September falling in the middle of this supply rebound cycle. This seasonal pattern helps explain the consistent September declines.

In addition to these factors, the bond market faces multiple challenges this month. If U.S. economic data continues to exceed expectations, it could delay the Federal Reserve's rate cuts. Meanwhile, if the Bank of Japan signals a hawkish stance, it could lead to a global re-pricing of interest rates. Against the backdrop of France's political crisis, which has driven up bond yields, the convergence of these risks makes September a particularly dangerous month for bond investors.