US stocks and government bonds are experiencing their worst month this year, partly due to the Federal Reserve’s indication that interest rates will remain high for longer than expected. The S&P 500 stock index has fallen over 5% in September and is on track for its first quarterly loss in 12 months. The US bond market has also declined, with the yield on 10-year Treasury bonds reaching its highest level since 2007. The market had initially expected aggressive interest rate cuts by the Fed, but now there is a realization that rates will stay higher for longer. This expectation has impacted equities and corporate debt markets, as higher rates affect investors’ search for returns and the ability of highly indebted companies to refinance their borrowings. The Fed’s response is driven by strong economic data and a strong labor market. Some investors are concerned that higher rates could lead to a recession, despite positive data. The recent increase in oil prices has further fueled concerns about inflation and tight monetary policies. Ultimately, the market is adjusting to the view that a recession is not imminent.
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