A brutal September for bonds points to an even darker October

By Joseph Adinolfi

If history is any guide, the bond-market pain isn't over yet

The bond-market pain might not be over yet.

September was a brutal month for the bond market. If history is any guide, October might be even worse.

As the U.S. Treasury market wrapped up its worst quarter in years, the Bloomberg U.S. Aggregate Total Return Index - better known as the AGG - fell by more than 2.5% for the month of September, according to Dow Jones Market Data. That marked its biggest monthly drop since at least April 30.

Through this year, September has become the second-worst month of the year, on average, for the AGG, according to performance data going back to 2000. The only month that has seen a bigger average decline has been October.

Since 2000, a red September for the AGG has often been followed by a red October - a seasonal trend that has only hardened over the past 10 years, as Guy LeBas, fixed-income strategist at Janney, pointed out. The AGG posted back-to-back September and October losses in 2016, 2018, 2020, 2021, 2022 and 2023.

 
                                              Bloomberg U.S. Aggregate Total Return Index 
Month                                                                                                  Average Performance (%)   Rank 
January                                                                                                0.51                      4 
February                                                                                               0.25                      8 
March                                                                                                  0.05                      10 
April                                                                                                  0.15                      9 
May                                                                                                    0.38                      6 
June                                                                                                   0.31                      7 
July                                                                                                   0.61                      3 
August                                                                                                 0.69                      1 
September                                                                                              -0.04                     11 
October                                                                                                -0.11                     12 
November                                                                                               0.63                      2 
December                                                                                               0.42                      5 
Note: Average performance from January 2000 to September 2026. Source: Dow Jones Market Data; FactSet 

Still, investors probably shouldn't read too much into these seasonal signals, LeBas said. When it comes to potential bond-market pain points, investors have plenty to choose from. Inflation has persisted above the Federal Reserve's 2% target for five years, a fact that in September pushed the central bank to start raising interest rates for the first time in three years.

The investment boom inspired by the artificial-intelligence build-out is increasing competition for investment capital that might have otherwise flowed into the Treasury market. Signs that the U.S. economy and labor market have been reaccelerating have rendered investors less interested in holding safer assets like bonds, as the recession that looked all but certain a few years ago never arrived.

"I don't think there's anything magic about the months of September and October, save for a few random periods of bad luck," LeBas told MarketWatch.

The flip side of all of this pain is that higher yields make bonds a more attractive investment for investors. Andrew Krei, chief investment officer at Crescent Grove, a wealth-management firm serving high-net-worth clients, said wealth managers have been getting more calls from clients about opportunities in the bond market.

"I think people are looking at the headline number and saying 5%, 6%, 7% is looking really attractive after we've had such a strong run in equities," Krei told MarketWatch.

Higher yields mean higher regular payouts for investors. This can help offset any paper losses that new buyers might experience if the move in yields continues higher from here.

And there is a good chance that it might. The bond market is typically heavily influenced by slow-moving macroeconomic trends, LeBas pointed out.

For example, investors have been warning about the risks of unsustainable U.S. budget deficits for years. But these worries have only recently started to impact prices, bond-market experts told MarketWatch.

"If this data tells you anything about the momentum in the bond market, it is that longer-term changes in the economic environment can persist for multiple months," LeBas said.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-30-26 1656ET