Blain’s Morning Porridge – September 24^th, 2026 – The Bond Markets are set to roil markets with a Reset

“The bond market is not your friend. It is reality.”

In Bond Markets there is truth – and they are flashing warning signals a systemic market reset is on the cards. As rates rise, the relative prices of all financial assets will be impacted as the price of money normalises. It’s a period of transition with a high chance of an unstable reset, which is magnified by QE setting a false expectation of long-term low rates, and the growing realisation financial systems will suffer from political incompetence.

LINK TO PODCAST

Key Takeaways:

• Equities tell stories and sell upside narrative. Bonds impose financial reality. They impose that reality around the market in terms of relative yields – the risk-free rate.
• It is not as simple as inflation means bond yields have to rise. Refinancing risk is critical and involves addressing government debt burdens by factoring inflation, the debt quantum and refinancing schedule, alternative asset prices, political competency and the election cycle. Its complex.
• Fiscal credibility between governments and central banks is critical – but is increasingly questionable, meaning addressing future crises may become problematical.
• There is a danger that government bonds go into a critical chain reaction – rising bond yields raise refinancing costs, increasing deficits, increasing refinancing risks, rising supply, rising yields – where are the control rods to dampen the reaction?
• After years of low rates, cheap money, inflated expectations, and speculation, the whole edifice of modern markets are vulnerable to a corrective reset. It could shake every financial asset from AI to Zero Coupon Bonds. (Come on, respect for thinking up a financial asset beginning with Z!)

As I face the blank page yet again this morning… I’m wondering how I convey the sense of bond yields are scary without sounding like a broken record. In Bonds there is Truth. Bonds are the market’s very own Terminator. They will happily kill us all given half a chance… and they are much more dangerous and demonstrably determined to do so than rogue AIs. On the other hand, the Sun usually comes up each morning. “Things are never as bad as we fear, but seldom as good as we hope…” as Blain’s Market Mantra No 2 explains.

There is clearly a rising sense of market gloom around inflation, an affordability crisis hitting consumption, the confidence-busting concerns about AI eating jobs, and a general sense the global economy is on shaky ground…. Yet, the immediate market fear is the concern that the US economy is overheating (!), thus the only solution open to the Fed to combat inflation is therefore higher rates – meaning another Hike next month is shaking markets.

Yet the core issue at the heart of rising inflation is higher energy costs – which inevitably will cause a contraction in economic activity. (At this stage I had a sudden vision of decapitated chickens going full speed round the yard. This is why coffee is proof of a divine being.)

This morning, yet again, the markets are all a’dither again over rising bond yields.

Bonds scare us because they don’t lie. They don’t have a narrative to sell. They reflect exactly what the numbers tell us. When Bond yields start to look chaotic – hitting new record levels (which actually are actually that high historically) – then the market’s ancestral memory kicks in…

There is a deeply rooted fear, call it a genetic memory, that sits at the core of the market’s mentality: rising interest rates and bond crashes will precipitate a reset. What terrifies the market today is just how big a reset now could be. Interest rates are “normalising” after 18 years of artificially low rates, kept low and repressed through the QE era. Low rates and intervention got deeply embedded into the thinking of the current market generation.

If there is a reset now, then the fear is it will overturn “the whole distorted conundrum of unlikely expectations and fantabulous claims that currently passes as justification for over-inflated and over-priced Financial Assets Markets…” (Yep… that me quoting myself…) If one pieces wobbles… then the whole edifice of markets, from the AI bubble, inflated Total Addressable Markets, future sales of robots and autotaxis, private equity, private credit, jobs, growth and everything in between, might just come crashing down…

Don’t let it ruin your day.

It happens time and time again in financial markets when hopes outrun reality and prices need a reset. It will happen. It always does. Will it happen as a series of corrective tremblors that let the steam out the kettle? Or will we get a Richter Mag 10 Earthquake?

The good news is there is plenty of money on the sidelines waiting for a buying opportunity. They question is how patient and sustainable is that money. Will it head elsewhere or will it survive a violent reset?

On the other hand,… this time it is … different.

The World is a very different place to what was the norm during the equity crash of 1987, the LTCM bailout of 1998, the Dot-Com bubble of 2000, or the Global Financial Crisis of 2008. Since then, we’ve been cosseted in the cotton wool of low interest rates and the expectation (reinforced by the interventions during Covid) that central banks and politicians exist to keep markets stable to keep the economy on track.

Will that continue? Can governments afford to?

There is also rising political instability as a tide of right-wing populism promising easy answers sweeps Europe, and a numpty sits in the White House polarising the most successful nation in history against itself. I use the word numpty deliberately – most politicians have the good sense not to reveal their weaknesses. Trump mistakes his for strength – and we’re all shocked in that Emperor’s New Clothes kind of way. The consequences on markets are clear – diminished confidence in US Treasuries and the Dollar.

Some say it’s all about the cost of diesel. Maybe it is… but the most difficult job in the World will be explaining to the US President that stopping Diesel exports will push domestic prices higher… because that would entail explaining that Diesel does not flow directly from the Ozark Diesel mines, but is a fractional distillate of crude oil…

I have a sense the crisis is upon us. And it’s not just the misplaced economic incompetence dressed up as irrefutable facts so clearly on display in the White House, or the rising doubts the current administration will respond well and be able to deal with a financial crises – which will involve not only internal domestic agreement, but playing nice with all the other nations and central banks Trump has so assiduously insulted and roiled these past 2 years.

Yesterday the marvellous Kristalina Georgieva, the head of the IMF, was on the wires urging the US and UK to swiftly reduce their debt. I’ve loved her description: “debt levels are soaring like a stairway to somewhere other than heaven”. She cited the cost of debt servicing as a factor to address.

She’s watching the wrong thing. Rising debt servicing costs are just the “bustle in the hedgerow” warning light… (If you don’t get that reference… then you haven’t been listening to enough Prog Rock).

Refinancing risks are more likely to be a Mike Tyson punch in the face moment – when bond yields have to rise to attract buyers, triggering exactly the kind cataclysmic consequences from a financial reset across the real economy and financial assets that I described above.

I don’t believe in the bogeymen of bond vigilantes. If investors are going to keep buying bonds and keep interest rates low enough to allow a soft reset, then they need to be convinced there is economic competency at the top – which means political stability (plus controlled inflation and the rest.) I see limited chances of that occurring. Therefore, rates will rise, and it will impact other financial assets to a greater or lesser extent.

Rising interest rates and rising demand for capital is part of the problem. At its simplest we have Trump’s borderline-in-control of US Government spending needing to raise $1 trillion each month to refinance existing debt (soaring interest rate payments are just a rounding error in comparison), while inflation shows no sign of abating, and the Tech Bros are raising billions to finance AI infrastructure (which no one knows if it’s going to generate real returns to repay!)

Investors don’t yet fear the US will default on bonds, but with that scale of refinancing risk, and what they see in DC, they want properly paid for taking US risk.

That’s why markets are increasingly worried the reset is coming.

Next question?

Out of time and off to do the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Meanwhile, don’t forget about my new book: The Battle for Hamble

You can read a review on the Society of Professional Economist’s website here.