Bond Yields – October 5, 2026

October 5, 2026

The yield on 10-year US Treasury bonds has moved significantly higher in the past few months, from 4.4% on June 30 to 5.3% on September 30. This nearly full percentage point increase has had major implications for equities, bonds, and the economy. This post examines the causes of the rise in yields, what has happened as a result, and what this could mean for your portfolio going forward.

Drivers of the spike in long-term bond yields

  • Bonds for AI infrastructure: As in all markets, if the supply of bonds rises with no change in demand, prices should fall (meaning bond yields rise). This year has seen a massive increase in the amount of bonds being issued by corporations to fund the capital expenditures needed to bring AI datacenters online, and this trend shows no sign of slowing down. In fact, JPMorgan recently estimated that $4.1 trillion in AI-related debt will be issued from 2026-2030 to help fund $5.5 trillion in AI-related capital expenditures.1
  • Bonds to fund governments: Governments around the world have recently shown few signs of trying to reduce deficits or government debt levels. This means that the AI-related issuance is happening in addition to record amounts of sovereign debt issuance.2
  • Inflation remains high: There are many causes, but the main three for US inflation are currently (1) war-related supply disruptions (oil, oil refineries, liquefied natural gas, fertilizers), (2) supply shortages coming from the AI-boom (semiconductor memory, datacenter and power generation equipment and labor), and (3) housing supply shortages due to lack of new home and apartment construction, and the fact that most homeowners have locked in low interest rates in 2020-2021 as long as they don’t move.
  • US Federal Reserve: We put this last for a reason. While the Fed did recently hike interest rates, this was more so because of the above three drivers than being a driver itself. Also, the Fed typically exercises its control over short-term rather than long-term interest rates. The reason the Fed hiked, and why they are expected to hike another full 1.0% by the end of 2027,3 is because they are still battling to bring down inflation, which has been stubbornly above their 2.0% target ever since 2021.

Impact so far of higher bond yields

  • Equities: The S&P 500 Total Return Index finished Q3 up 3.1%, but under the surface, there was a major divergence between the world’s largest companies and everyone else. These megacap technology companies dominate the S&P 500 Index and drove the positive return, in part because they still have low levels of debt/capital. In contrast, companies that rely more on debt, which includes most small and mid-cap companies, were overall negative on the quarter.4 This makes sense because these more highly levered companies will need to roll or issue new debt at higher interest rates going forward, impacting earnings.
  • Bonds: The Bloomberg Aggregate US Bond Index was down 3.9% in Q3, an ugly return for what is supposed to be a safe asset class consisting mostly of US Treasury bonds. However, as discussed below, this could be an opportunity going forward.
  • Economy: The US economy has held up remarkably well in the face of higher rates, with the Atlanta Fed currently projecting +3.7% Real GDP growth in Q3. Part of the reason for the strong growth is the AI infrastructure boom. For the next several years, AI is now expected to have higher average annual infrastructure spending as a percentage of GDP than the railroad boom of 1870-90 and the telecom boom of 1996-2003 combined.

What does this mean going forward?

  • Equities: Higher rates are typically a headwind as investors demand a higher rate of return to invest in stocks. Earnings estimates have so far risen enough to offset this effect,6 but it makes for a higher growth hurdle for stocks going forward. The reason that interest rates move next likely matters as much as the direction. If inflation cools while growth remains healthy, easing yields could support higher stock valuations. If yields fall because the economy weakens sharply, lower valuation hurdles may be outweighed by falling earnings. And if inflation, wars, or fiscal concerns drive yields higher without improving the earnings outlook, equities could face a more difficult adjustment.
  • Bonds: For the same contractual set of future cash flows, fixed income prices have fallen as yields have risen. This makes buying bonds today at a 5.3% 10-year Treasury yield more attractive than three months ago (4.4%), and way more so than five years ago (1.5%). Bond yields could continue to move higher from here, but the odds of earning an attractive future rate of return from owning bonds have greatly risen. It also means that yields can now fall further in a recession scenario, making it more likely that longer-term bonds act as a proper hedge against falling equity prices.
  • Economy: In general, higher rates for mortgages, consumer loans, and corporate debt should act to dampen future economic growth. However, if rates are rising because productivity and growth are expanding, then the economy may continue to be able to absorb the higher financing costs. In addition, there is the offset that if growth were to cool, we would expect interest rates to fall in most scenarios. The economic consequences are more severe if inflation stays high despite lower growth.

Bottom Line:

At GGS, our goal is to build clients diversified portfolios that have the best future risk-reward prospects over a full market cycle. Despite the recent fall in bond prices, we believe that bonds remain an important diversifier in client portfolios and are more attractive now than they have been in decades. We therefore highly recommend that clients stick with their current bond allocation both for the expected income benefits and potential downside protection in a recessionary economic scenario.

 Sources:

  1. JPM Daily Credit Strategy Update, June 16, 2026
  2.  https://www.oecd.org/en/publications/2026/03/global-debt-report-2026_59d2d627.html
  3. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
  4. The S&P Midcap 400 Total Return Index was -6% in Q3, while the small cap Russell 2000 Total Return Index was -7%
  5. https://www.wsj.com/economy/the-ai-build-out-is-becoming-the-biggest-economic-bet-in-u-s-history-c60716dd
  6. https://finance.yahoo.com/markets/article/3-charts-that-will-make-investors-fall-in-love-with-stocks-again-131339630.html

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