Bonds suffer bruising September, but stocks remain resilient

MILAN/SINGAPORE, Sept 30 (Reuters) - Global bonds inched up on Wednesday but were set for their worst month in years, hit by a mix of deteriorating government finances, a glut of debt issuance and rising inflation as the seven-month-old US-Israeli war on Iran keeps energy costs elevated.

Stocks fared better, however, largely unfazed by the recent surge in ‌bond yields, supported by robust earnings growth, strength in the global economy and continued enthusiasm for artificial intelligence. Equity indexes rose across Asia overnight and were broadly unchanged in Europe, while US ‌futures pointed to a slightly lower open on Wall Street.

The rise in borrowing costs has been front-and-centre for investors, given that sovereign yields are an anchor for global markets, a reference price for investing in riskier stocks and a benchmark for mortgages and corporate borrowing.

Benchmark ​10-year US Treasury yields held just below their highest level since June 2007 at 5.2363% in the European hours, down 1.9 basis points (bps). They were set for a rise of more than 47 bps this month, the largest move in about two years. Bond yields move inversely to prices.

The 2-year Treasury yield dipped 1.0 bps to 4.8787% after New York Federal Reserve President John Williams pushed back against expectations for earlier policy tightening, though it remained more than 50 bps higher for the month.

"We have reached yield levels that are becoming genuinely significant," said Carlo Franchini, head of institutional clients at Milan-based Banca Ifigest. "The temptation to move out of equities could become an issue."

However, Franchini said he ‌was not yet taking profits on stocks, betting that equities could remain ⁠supported through October if easing tensions around the Strait of Hormuz helped bring down oil prices and relieve some of the pressure on bond yields. "In my view it is better to stay long," he said.

With bond markets searching for fresh direction, investors were awaiting the Fed's preferred inflation measure, the PCE index, for August later in the day. ⁠Economists polled by Reuters expect annual inflation of 3.7%, while money markets now see roughly even odds of an October rate hike by the Fed, down sharply from more than 70% on Tuesday.

Yields on 10-year German and French government bonds hit 17-year and 18-year highs this week and were set for rises of about 26 bps and 63 bps, respectively, for the month. [GVD/EUR]

German inflation figures for September were also due, while data in Europe showed French consumer prices rising more than ​expected ​in September and Italy's annual EU-harmonised inflation rate accelerating to 4.1% amid soaring energy costs. .