Monthly Update – September 2025

Summary: Loss of central bank control?

• The US Treasury is currently employing various measures to support the market for US government bonds and to increase liquidity within the financial system.
• Simultaneously, the US dollar is being deliberately weakened to stimulate American exports – a weaker US dollar also allows foreign central banks to ease their monetary policy, thereby further boosting global liquidity.
• Equity and credit markets are benefiting from increased liquidity – we remain slightly overweight in risk exposure.

Overall economic situation

Global economic activity has for some time been supported by high levels of government spending and a sharp rise in market liquidity. This development is not sustainable: risks will emerge once these stimuli are reduced or withdrawn altogether. For the moment, however, no immediate threats are evident. In addition to the US, China is currently exerting a positive influence on global liquidity, as monetary policy is being eased and the domestic economy stabilised.

Recent developments: Global liquidity continues to rise

• For some time now, the US Treasury has been actively manipulating the yield curve and financial market liquidity. Rapidly expanding government debt is being financed through the issuance of T-Bills rather than longer-term bonds and notes. T-Bills are cash-like instruments and thus contribute to higher financial market liquidity. Simultaneously, they relieve pressure on the long end of the yield curve, helping to suppress yields on long-term government bonds.
• With over 60% of global central banks currently easing their monetary policy – notably the People’s Bank of China (PBoC) – global financial market liquidity is rising. This is driving prices for risk assets (equities, corporate bonds, and also Bitcoin) sharply higher across the globe.
• The increasing liquidity and elevated government spending are also pushing up long-term government bond yields, inflation, and especially inflation expectations. However, these risks remain relatively contained for now and are largely ignored by equity and bond markets.

Overview & outlook: Ample fuel for financial markets

• The US Treasury and the Fed have for some time been attempting to push down long-end yields. Several measures are being deployed. In addition to the increased issuance of T-Bills (which, given their cash-like nature, raise liquidity in the financial system), long-dated Treasuries are being repurchased in the market, pushing up their prices and lowering yields. Moreover, public pressure is being exerted on the Fed and even the Bureau of Labor Statistics (BLS), with the aim of influencing the bond markets.
• It is also expected that the Supplementary Leverage Ratio (SLR) will be relaxed in the near future, enabling the US banking system to purchase more government bonds. In parallel with the Treasury’s actions, the Fed is injecting targeted liquidity to dampen volatility in bond markets and reduce spreads in money markets. The MOVE volatility index for US Treasuries has declined accordingly in recent months.
• All these measures aim not only to lower long-term yields but also to increase liquidity in the financial system, thereby supporting equity and credit markets for the time being. This is also likely to exert downward pressure on the US dollar, a development welcomed and encouraged by the US government and the Treasury.
• This American money-printing machinery is influencing global financial markets – amplified by the fact that many other central banks are also easing their monetary policy. China alone has injected the equivalent of more than USD 1.5 trillion into its financial system in recent months.
• In addition to fuelling financial markets, global economic activity is also benefiting. GDPNow estimates point to robust growth in the US and a moderate recovery in Europe (despite US tariffs). These feedback loops reinforce the positive trend in equity and credit markets but also contribute to upward pressure on long-term government bond yields and inflation.

Chart: Expected US Treasury volatility declines

Positioning: Risk exposure remains neutral to slightly overweight

• Given the sharp rise in global liquidity outlined above, markets for risk assets (equities, corporate bonds, and also Bitcoin) remain supported, while potential risks are almost completely ignored or pushed into the background. Even a cooling US labour market is not currently interpreted as a risk for the economy and markets, but rather as an opportunity for the Fed to lower rates further – which would add fuel to the equity rally.
• In the present environment, existing market trends are likely to persist, provided no major change in liquidity conditions emerges. As a result, equity and credit risk exposures can remain neutral to slightly overweight. In contrast, caution is warranted with government bonds (both US and European) and the US dollar. The liquidity-driven rise in inflationary pressures could at any time lead to renewed increases in long-term government bond yields.
• That said, the current uptrend in markets and the economy rests largely on rising government spending and monetary expansion by central banks and the US Treasury. Moreover, US valuations have reached elevated levels and market concentration is unusually high, while investor exuberance continues to build. Risks are being ignored.
• In sum, global financial markets are sitting on a powder keg. Yet the prevailing uptrend remains intact. Sell signals would only emerge if – individually or in combination – the following conditions were to materialise: a) the US dollar depreciates by at least 5 to 8%, b) 10-year US Treasury yields rise above 4.6%, c) 30-year yields on Japanese government bonds reach 3.5%, d) global liquidity declines, or e) inflation rises significantly. Only then would the probability of a prolonged correction in equity markets increase substantially.

On the radar: Yield curve interventions losing effectiveness

Since the Fed and the ECB began their rate-cutting cycles, yields on 10-year government bonds have risen significantly. As a result, the long end of the yield curve has been moving contrary to the intentions of the central banks. This development is troubling and points to an incipient loss of control by both the Fed and the ECB over the pricing of long-dated government bonds. The chart below illustrates this in the case of the ECB.

The reasons lie partly in stubborn inflation, particularly in the US. Investors are therefore demanding higher risk premia on government bonds to compensate for the risk of inflation eroding value. In addition, surging government debt – again especially in the US – is exerting upward pressure on yields.

Yields are rising even though the US Treasury and the Fed are employing every available tool to push the long end lower. Almost exclusively T-Bills are being issued in place of longer-dated Treasuries, reducing supply at the long end. At the same time, the Fed is injecting liquidity into the market to dampen volatility, which should also restrain yields. The relaxation of the Supplementary Leverage Ratio (SLR) remains under discussion, which would also bolster banks’ demand for Treasuries.

As all these measures are proving less effective, a genuine loss of central bank control looms. Further policy rate cuts in September could exacerbate the situation, as inflation fears would be reignited. Rising yields on 30- and 40-year Japanese government bonds (JGBs) add another layer of risk, as they could attract capital flows into Japan and thus push US Treasury and Bund yields higher.

Chart: Long-term government bond yields rising despite rate cuts