The Overnight Report: Bond Ructions Are Back

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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

US markets retreated, led by technology shares, with Nasdaq down the most.

Treasury yields moved higher across the world, including the US, taking down the more interest rate sensitive sectors of the markets (including tech).

After a slightly weaker day yesterday, ASX200 futures are pointing to a flat-to-slightly negative start.

Good Morning,

The Australian market recovered from intraday losses, closing down -3 points to 9,070.

Healthcare rallied strongly, up 7.8% as CSL ((CSL)), Cochlear ((COH)) and Pro Medicus ((PME)) bounced strongly on FY26 results. 

Scheduled result releases for today include Breville Group ((BRG)), Evolution Mining ((EVN)), Superloop ((SLC)), Santos ((STO)), and Whitehaven Coal ((WHC)), among many more.

August reporting season is in full swing, to stay in touch with which companies are due to report, check out the the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Barrenjoey’s early response following Iluka Resources’ ((ILU)) release this morning:

“Earnings a 54% beat to consensus driven by lower D&A and tax credits. Interim dividend of A3cps, 13% ahead of consensus, reflecting the pass through from DRR. Eneabba progressing on schedule and budget with construction 60% complete and commissioning expected in 2027. Balranald ramp up continuing with first final product to be produced in H2 26.”

Citi’s quick response on Ebos Group’s ((EBO)) release:

“EBO’s FY26 print was in line with VA consensus all the way down the P&L and leaves little to pick at, in our view.

“If anything, corporate costs were lower than expected and perhaps Animal Care sales were a little light, but at 35% YoY growth for this (smaller) segment, we do not think investors will take issue. Operational Execution looks to be in line with plans laid out at the company’s CMD a few months ago and consensus is in the middle of the guided range for core EBITDA for FY27.

“We suspect this could be conservative given the new distribution centre network is now complete and can drive benefits over the coming 2-3 years.”

Don’t forget the FNArena corporate results monitor to track the earnings reports.

https://fnarena.com/index.php/reporting_season/

Today’s Big Picture, J.L. Bernstein extract

Expensive Money Hit the AI Trade

Every stock in the Philadelphia semiconductor index finished lower.

The companies that borrow to build fell furthest, with CoreWeave, Nebius and TeraWulf leading the way down.

The Wall Street Journal reported that Big Tech’s AI commitments don’t all show up on the balance sheet.

Cheap debt was the quiet assumption under this whole buildout, and it stopped being cheap.

The War Showed Up in Shipping Again 

A cargo ship was struck by a projectile off the coast of Oman overnight, wrecking the engine room and killing a crew member.

The UAE said it tracked two Iranian ballistic missiles, one landing inside its waters.

Brent traded near US$91 and crude has now risen three sessions running.

Oil is the fastest route from this war into the inflation data, which is why the bond market is paying attention.

Healthcare Took the Money 

Health care and biotech indexes closed at all time highs on a day tech sold off.

Johnson & Johnson traded toward its first record close since July 7.

The State Street and Vanguard health care funds both set records, with Eli Lilly and J&J making up about a quarter of each.

Money rotated today, it didn’t leave.

ANZ Bank, Australian Morning Focus extract

Poor fixed income market sentiment and ongoing geopolitical challenges weighed on most equity markets.

The S&P500 was down -0.6%, the EuroStoxx50 was down -1.0% and the FTSE100 rose 0.1%.

The yield on the US 10-yr Treasury fell -3bp to 4.71%. Oil prices were mildly firmer. WTI rose 0.2% to US$85/bbl. Gold fell -1% to US$4,350/oz.

US import prices: July import prices fell -0.4% m/m but rose 0.3% m/m ex-petroleum. Core import prices are settling at a slower incremental monthly rise than earlier this year, which is encouraging.

Imports ex-petroleum account for 10% of consumer expenditure. Semiconductor import prices remained strong, however, rising 1.4% m/m. The inflationary impact of the AI build-out will remain a key focus for the Fed.

Euro area: August ZEW economic expectations rose 8pts to 31.4, the highest since February.

US housing and industrial production data lacklustre: July housing market data disappointed and manufacturing output edged up 0.2% m/m to continue the theme of a lacklustre start to Q3 economic activity. The recent rise in the 30y bond yield is an additional headwind for housing activity, given it is driving mortgage rates higher.

July pending home sales fell -2.3% m/m and were down -2.5% y/y, while housing starts fell 12.4% m/m to be down 5.4% ytd. The housing market is sensitive to developments not just in mortgage rates but also consumer confidence (weak), the jobs market (hiring weak), credit availability (okay) and wealth effects (strong for the top 20%).

Housing activity is weak and indicative of a restrictive monetary policy for that sector.

Industrial production data painted a similar picture. Business equipment production was strong (0.6% m/m) led by ongoing expenditure on AI, space equipment and defence.

In July, high-tech production rose 11.8% y/y. Excluding high-tech, manufacturing output rose 0.8% y/y and excluding auto production, the output of consumer goods fell 1.5% y/y. Economic activity continues to be unbalanced, with affordability issues affecting most consumers and fundamental to the K-shaped economy.

The energy sector edge up as Middle East supply remains disrupted. Precious metals fell on higher bonds yields and a stronger USD.

US Treasury demand is holding, but the buyer base is shifting, Oxford Economics extract

We expect Treasury yields to stay elevated in the near term, then gradually decline next year.

Elevated inflation should keep the Federal Reserve hawkish through 2026, but easing services inflation and a cooling labor market should prevent hikes and support progress toward the 2% target in 2027.

We expect Treasury yields to be steadier over the next couple of quarters before gradually declining next year. 

Stickier inflation will keep the Federal Reserve sounding hawkish for the remainder of 2026. With services disinflation in place and a labor market that’s far from overheating, we expect the Fed to resist pressure to hike rates, and inflation to make sustainable progress toward the central bank’s 2% target next year, allowing Treasury yields to decline.

We think the speed of improvement will be slow, particularly for the long end of the curve, as supply pressures, inflation risks, and Treasury demand questions keep Treasury term premiums elevated.

We think long-end yields will fall slowly as term premiums remain elevated due to heavy Treasury supply, persistent inflation risks, geopolitical uncertainty, and record corporate borrowing tied to AI investment.

Treasury demand is shifting toward more price-sensitive buyers. Weaker foreign demand gives investment funds and leveraged investors a larger role. Recent statements suggest the Treasury will respond by relying more on bills and shorter-term coupon issuance to ease absorption pressures.

As foreign investors and the Fed play a smaller role, investment funds and leveraged investors are more important in setting prices. They can absorb supply when volatility is low, funding is cheap, and relative-value trades are attractive, but their interest is more conditional.

That leaves the Treasury market more exposed to episodes of higher volatility. A broader reduction in appetite for Treasuries amid concerns about the size of global debt, or risks of repo market turmoil if the Fed resumes shrinking its balance sheet, could do so.

In that environment, auction concessions would probably rise, term premiums would remain elevated, and long-end yields could overshoot our baseline forecast.

The surge in AI-related corporate borrowing adds another risk. Investment-grade corporate bond issuance has reached US$1.5tn this year, according to Bloomberg, a 36% increase from last year.

Borrowing by the largest tech companies has been roughly 25% of net Treasury note and bond issuance this year.

If investors start to question the expected return, a sell-off in AI-linked credit could widen corporate spreads and absorb more balance-sheet capacity.

In a simple risk-off episode, Treasuries could still benefit from safe-haven demand. But if the sell-off forces funds to cut risk, unwind basis trades, or reduce duration exposure, the spillover could be higher Treasury volatility rather than lower yields.

We still expect yields to gradually decline in 2027 as inflation slows and the Fed eventually gains room to ease, but the changing buyer base argues against a rapid fall in long-end yields.

Bond Vigilantes are back, Nigel Green, deVere Group extract

Bond vigilantes are back in the room, and equities are about to find out what that costs.

Bond vigilantes never went away, they just went quiet for a while, and what we are watching now is the reawakening. 

Long-dated yields above 5% for the better part of a month, an oil price climbing past US$85 on Middle East risk, and inflation still running above target five years running: that combination is exactly what wakes the vigilantes up.

The US 30-year Treasury yield has traded above 5% on more sessions this year than in any year since 2007, when it spent 50 trading days at that level. 

The Treasury market itself has swollen from US$4.5 trillion in 2007 to more than US$31 trillion today, while federal debt has doubled as a share of the economy to beyond 100% and annual interest payments have pushed past US$1 trillion for the first time.

A government paying more than US$1 trillion a year just to service debt, with a fresh wave of long-dated issuance still to come, is a government whose bond buyers get to set the terms. 

Investors are no longer taking on faith that spending gets brought under control. Indeed, they’re pricing the risk that it doesn’t.

Renewed tension around the Strait of Hormuz and a stalled path toward any US-Iran settlement have pushed crude firmly higher, reviving inflation worries just as traders had been paring back expectations for further interest-rate cuts. 

Every dollar added to the oil price makes the inflation argument harder for the Federal Reserve and easier for the vigilantes.

A central bank trying to cut into an inflation backdrop that refuses to cooperate is a central bank that loses credibility with the people buying its government’s debt, and once credibility goes, yields stop reflecting growth expectations and start reflecting a demand for compensation.

Sovereign issuance is not the only long-dated paper flooding the market right now. Hyperscale borrowing to fund AI infrastructure is competing for the same pool of buyers at the same moment governments need those buyers most. 

Crowd two urgent borrowers into one market and the price of patience goes up for everybody.

Equity valuations built on cheap discount rates are likely to come under direct pressure, and the most expensive, most narrative-driven parts of the market feel it first.

Second, governments face a real choice between spending discipline and materially higher borrowing costs, and markets will keep testing which one they choose. 

Third, currencies and emerging markets absorb the spillover, because capital chases the highest safe yield wherever it appears.

Nobody rings a bell when vigilantes take control. With 30-year yields at a near two-decade high, oil climbing on real geopolitical risk, and a government borrowing more than a trillion dollars a year just to stand still already qualify as the warning sign, happening right now, and portfolios still priced for calm bond markets need to catch up with it quickly.

Corporate news in Australia:

• TPG Inc has bid $24.55 cash per share for EQT Holdings ((EQT)), sending the stock to its best trading day in 41 years
• Brookfield has offered $4.1bn for Reliance Worldwide ((RWC)), sending shares up 24%
• KKR has appointed Rothschild & Co to seek a buyer for Australia and New Zealand boutique hostel and hotel operator Drifter, which is expected to fetch more than $500m
• Tuhu has emerged as a third bidder for Continental’s Australian automotive repair chain mycar as the sale process enters its second round
• Glencore could enter the ASX100 as early as March or April 2027 following its planned secondary ASX listing in October
• Alphabet’s Kangaroo bond sale attracted more than US$13bn of investor interest

On the calendar today:

-NZ 2Q PPI

-AU 2Q WPI

-JP June core mach orders

-EZ July CPI

-EZ June Current A/C

-UK July CPI & PPI

-US July FOMC mins

-ARB CORPORATION LIMITED ((ARB)) FY26 earnings report

-BETR ENTERTAINMENT LIMITED ((BBT)) FY26 earnings report

-BREVILLE GROUP LIMITED ((BRG)) FY26 earnings report

-BWP TRUST ((BWP)) FY26 earnings report

-COMMONWEALTH BANK OF AUSTRALIA ((CBA)) ex-div 270.00c (100%)

-DETERRA ROYALTIES LIMITED ((DRR)) FY26 earnings report

-EBOS GROUP LIMITED ((EBO)) Fy26 earnings report

-EVOLUTION MINING LIMITED ((EVN)) FY26 earnings report

-HEALIUS LIMITED ((HLS)) FY26 earnings report

-HANSEN TECHNOLOGIES LIMITED ((HSN)) FY26 earnings report

-ILUKA RESOURCES LIMITED ((ILU)) 1H26 earnings report

-IPH LIMITED ((IPH)) FY26 earnings report

-MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) FY26 earnings report

-MIRVAC GROUP ((MGR)) FY26 earnings report

-RESMED INC ((RMD)) ex-div 6.55c

-SCALARE PARTNERS HOLDINGS LIMITED ((SCP)) FY26 earnings report

-STOCKLAND ((SGP)) FY26 earnings report

-SUPERLOOP LIMITED ((SLC)) FY26 earnings report

-SPARK NEW ZEALAND LIMITED ((SPK)) FY26 earnings report

-SRG GLOBAL LIMITED ((SRG)) FY26 earnings report

-SERVICE STREAM LIMITED ((SSM)) FY26 earnings report

-SANTOS LIMITED ((STO)) H1 earnings report

-LOTTERY CORPORATION LIMITED ((TLC)) FY26 earnings report

-TEMPLE & WEBSTER GROUP LIMITED ((TPW)) FY26 earnings report

-WHITEHAVEN COAL LIMITED ((WHC)) FY26 earnings report

-YANCOAL AUSTRALIA LIMITED ((YAL)) FY26 earnings report

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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