Federated Hermes: Weekly Markets Wrap Up 8 October 2026
In this week's markets wrap-up, our investment experts discuss the recent sell-off in bonds, France's growing fiscal pressures and political uncertainty, and renewed optimism for Brazilian assets following the country's first-round election result.
RJ Gallo, Chief Investment Officer for Global Fixed Income at Federated Hermes
Bond Sell-Off Nearly Over?
September provided an exclamation mark on what was a challenging third quarter across bond sectors. Is the worst of this recent sell-off over? Well, the factors driving the sell-off have not reversed. So the answer to the question, then, lies in whether current US Treasury valuation fully prices in those variables. It seems the answer may be yes; Treasury yields have cheapened enough and the worst is over.
Of course, it may not be that easy. Price action remains challenging, with bond dealers and wary investors loath to assertively call the bottom. Implied volatility from options on US Treasuries has risen sharply, reflecting an unsettled market. Other key sovereign bond markets display similarities, with the yields on benchmark 10-year securities rising during the quarter and in September alone by 26 basis points in Germany, 21 basis points in Japan and 36 basis points in the United Kingdom.
The uncertainty and the risk that the Federal Reserve may hike well more than expected to establish a restrictive monetary stance keeps investors cautious.
Mitch Reznick, Head of Cross Border Credit at Federated Hermes
Is France Moving from Core to Periphery?
France is quickly becoming the focus of the European bond sell-off. The OAT-Bund spread has moved above 140 basis points, as attention turns to France’s high debt, large budget deficits, increased bond supply and political uncertainty ahead of the presidential election.
The velocity of the move matters. Investors are abandoning French government bonds for quality in German Bunds, which is magnifying the spread of the two wider. We are also seeing signs of pressure elsewhere, with Italian government bonds widening. Moreover, because France is so prominent in European indices, at over 20% in European high yield and CoCos, these indices are underperforming with French banks being particularly hit.
The European Central Bank is unlikely to step in at this point. But if spreads continue to widen and the pressure spreads further, its language could start to change. Some repricing of risk is not necessarily a bad thing. But France is increasingly being priced less like core Europe and more like the periphery.
Jon De Vos, Senior Investment Analyst for Global Emerging Markets at Federated Hermes
Brazil Rally Gains Momentum
We are more constructive on Brazilian asset prices following the first-round election result. This is because Flavio Bolsonaro is widely regarded by markets as a more fiscally credible candidate and is more likely to tackle Brazil’s critical issue of a large budget deficit and growing debt-to-GDP ratio.
Moreover, the composition of Congress, which has shifted to the right, and outcomes in several key states, should mean fewer alliances are needed to implement policies that address Brazil’s fiscal imbalance and support pro-growth initiatives.
The first-round result has increased investor confidence in the policy outlook for the country, which has helped to drive the sharp rally across bonds and the Real. Equities are mirroring the risk-on move seen in foreign exchange and rates. Strongest performers have been state-owned enterprises, financials, and other interest rate-sensitive sectors. We would expect these sectors to continue to outperform if Flavio is confirmed as the next president.