Global Bond Sell-Off Deepens as US Economy Shows Overheating Signs

A global bond sell-off is deepening as investors bet that the US economy is running too hot for the Federal Reserve's comfort.

The trigger is a rare combination: unemployment at 4.1%, growth running above trend, and inflation readings that keep coming in hotter than expected. Together, they point to an economy in a state of what analysts describe as modest overheating — and the Federal Reserve, as one market narrative puts it, will be "firmly on notice."

The pressure on policymakers is straightforward. If the next inflation prints continue to run hot, the Fed may conclude that aggregate demand needs to be brought lower. The tool available is blunt: higher interest rates.

Strongest expansion in five years

The case for concern got fresh ammunition from the US flash PMI figures for September. Activity expanded at the fastest pace in more than five years. New orders grew at their quickest rate since April 2022. Manufacturing hiring was the strongest since February 2021.

The engine behind the acceleration is twofold. Massive AI investment and resilient consumer spending outweighed worries led by energy prices, the same data showed.

But the strength comes with frictions. Supplier delivery times stretched, and input costs remained elevated, driven by high energy prices and supply-chain pressures. For bond investors, that mix — accelerating demand plus sticky input costs — reads as an inflation risk, not a growth story.

What to watch today

A heavy calendar of economic data could move markets further:

• 8.30am BST — Swiss National Bank's interest rate decision
• 11am BST — CBI distributive trades survey of UK retailers
• 1.30pm BST — US jobless claims data
• 3pm BST — Bank of England's Clare Lombardelli speaks on "Macroeconomic Policy in a Heterogeneous and Imperfectly Rational World"

The Swiss rate decision and the US jobless claims will land first for European traders already pricing in a more hawkish Fed path. Lombardelli's speech gives the Bank of England a platform to address the same question haunting markets: how central banks respond when growth refuses to cool.

The immediate risk for investors is that today's jobless claims and upcoming inflation readings confirm the overheating narrative, extending the sell-off in government bonds and pushing yields — and borrowing costs — higher still.