These shifts tell us that investors have been increasingly unwilling to buy Treasuries at previous yield levels. They demanded higher yields to compensate for a multitude of risks including rising oil prices which add to already persistent inflation, increased uncertainty regarding the Middle East, and the cost to finance the interest on $32.4 trillion of outstanding Treasury bonds held by the public.1 The annual interest cost on that debt is $1.1 trillion dollars, which is greater than annual spending on defense or Medicare. The Treasury sells bonds and T Bills at public auctions, competing in the capital markets with other investment options. It has had to increase yields to attract buyers.
Another $7.7 trillion of Treasuries are owned by other parts of the federal government, e.g., the Social Security and Medicare Trust funds, bringing the total national debt to $40.1 trillion.
Persistent and rising inflation directly erodes adjusted real returns of fixed rate bond interest payments and the power of bonds held to maturity. To maintain real returns, investors demand higher nominal yields. Investors require higher returns to hold long-term bonds than short-term bonds. That yield spread is the “term premium”.
Bond prices move in the opposite direction of yield movements, and vice versa as yields move inversely with the direction of bond prices. Higher yields on newly issued bonds drive down prices of existing bonds. The longer the duration (think maturity) of a bond, the more sensitive its price is to yield movements. This “duration risk” is one reason yields are higher at the long end of the curve. Each shift in the yield curve drove bond portfolio values down. The 30-year yield spiked to over 5.3% in mid-August, the highest since 2007. Investor expectations of further yield increases and resulting value destruction triggered a sell-off of longer duration U.S. Treasuries.
On August 19, Treasury Secretary Scott Bessent announced plans to increase its Treasury buy-back program from $2 billion per month to $6 billion. The stated objective was to increase liquidity for older issues of 20 to 30-year Treasuries. (This might have been a reaction to the Treasury’s 20-year bond auction results on the 15th. See below.) The Treasury sells short-term T-Bills to finance this buy-back of longer duration bonds. A so called “Switch” strategy that lowers the interest expense of financing at least a small portion of the national debt.
Many observers thought the increased buy-back plan was an effort to manipulate yields at the long end of the curve. The plan increases demand for longer duration Treasuries from a price insensitive buyer (the Treasury) which can drive prices up and yields down. The immediate market reaction was a sharp drop in the 10-year yield and a .4% uptick in the NASDAQ. The benefit was short-lived as the yield on the 10-year rebounded the next day and equity markets were mostly flat over the next few weeks.2
The yield curve bump in the first few weeks of September was driven in part by Inflation reports. September’s Producer Price Index rose .4% for the month, bringing the 12-month increase up to 5.4%. The Headline Consumer Price Index also rose .4%. Another driver was oil prices. They soared to over $100 per barrel, signaling that inflation was likely to be higher for longer. Finally, stock and bond markets priced in the effect of one or two expected Fed rate hikes by year end. Investors called for higher yields.
September’s Treasury auctions proved the point.
- The $39 billion ten-year auction on the 9th: Demand was very strong at the 4.83% yield level. Up from August’s auction yield of 4.68%.3
- The $22 billion 30-year auction on the 10th: Demand was strong at 5.31%, the highest since August 2001.4
- The $13 billion 20-year auction on the 15th: Demand was very weak, especially from foreign and institutional investors, the yield climbed to 5.42%. The highest since 1986 and .216 basis points higher than the August auction.5
On September 15th the 10-year yield closed at 5% for the first time in years. This resulted in a further bond sell-off.
On September 16th, as was widely expected, the Fed raised the Fed Funds rate by .25%. This is the discount rate that banks pay to borrow from the Fed. The instant reaction was a drop in the yield curve, and a stock market rally that ended a string of market losses. By the end of that week, the yield curve was higher than before the hike, due to continuing fears of higher inflation and further Fed rate hikes. The 10-year closed at 5.01%.6 Equity market returns were mixed. The Nasdaq gained .72%. The S&P 500 and the Dow were down .08% and 1.69% respectively.
The Fed has left the door open for additional rate increases. That has kept upward pressure on long-term rates for the rest of the month. Yields continued to climb when Core Personal Consumption Expenditures (PCE) inflation came in at 3%. Economic strength, as evidenced by strong retail sales, the Purchasing Managers Index (PMI) jumping to 58.4%, the highest since 2021, and the Atlanta Fed’s current GDP Now Model estimate for Q3 GDP growth at 3.7%, has kept inflation worries high, and given the Fed even more reasons to raise rates.
So good economic news, moved yields even higher. The month ended with Treasury yields at muti-decade highs: the 2-year at 4.87%, the 5-year at 5.07%, the 10-year at 5.31%, and the 30-year at 5.67%. The result was a global sell off of U.S. Treasurys in the last few weeks of the month.
Inflation and geopolitical worries are not the sole reason for rising yields. Supply and demand for debt financing also comes into play. When increased supply outpaces demand, yields rise. Currently, there is upward pressure on the front-end of the curve (three-month T-Bills) because of inflation. AI companies issued bonds to finance data center buildout which increased yields, especially in the two-to-ten-year belly of the curve. Persistent issuance of Treasury bonds (currently $10 billion per day) to finance current debt and future deficits will maintain the long-end term premium.7,8
What are the implications of an elevated yield curve for long-term equity and fixed income investors?
Our longer-term outlook for equities remains cautiously optimistic. One reason is the strong economy as outlined above. Other positive economic factors are a stable labor environment, continued high levels of hyperscaler data center CapEx investment and potential AI productivity gains. High and widening corporate earnings growth is another reason for optimism. Roughly 78% of the S&P 500 companies beat earnings estimates with positive revisions across industries.9 A flip side is that, if future earnings expectations are not met, markets will fall.
Valuations remain elevated, arguably supported by earnings growth. That said, we, like many others, have concerns about the sustainability of earnings at these levels.
That outlook notwithstanding, high bond yields present multiple headwinds for stock prices. The 10-year yield is the primary benchmark for consumer debt and influences longer term borrowing costs. The 30-year fixed mortgage rate has climbed above 7%. Higher interest rates depress consumer spending, hurt small businesses, and generally slow economic growth. Increased business borrowing costs reduce profit margins of public companies and reduce dollars available for expansion and share buy-backs.
The intrinsic value of a stock is the present value of its future cash flows. Financially, the discount rate used to calculate this value is heavily tied to risk-free interest rates (like the 10-year Treasury). When rates rise the present value of future earnings falls. This directly causes equity value or multiple compression, hitting high growth and technology sectors hardest.
Elevated discount rates also depress the value of other assets such as real estate, private credit and equity, even your neighborhood’s small businesses.
The 10-year yield is the risk-free rate against which investors measure the value of the equity risk premium. Historically, a 10-year rate of 5% or higher is the threshold at which many investors prefer bonds over stocks, judging that the excess return or premium potential from equities is not worth the risk. This “flight to quality” and the multiple compression (evidenced by lower prices for some stocks which have not had earnings revisions) are reflected in September’s equity index returns: Nasdaq 1.9%, S&P 500 -.45%, Russell 1000 -.82% and Russell 2000 -.69%. Tech stock earnings overcame the pressure of high yields. Year to date through 9/30 those indexes have posted double digit returns ranging from 12.06% to 15.6%.
If rising inflation and rising rate concerns are realized, then bond values will face interest rate risk, inflation-adjusted bond yields will be lower and buying power at maturity will be eroded. If history holds, equities are likely to be the best long-term inflation hedge over the next ten years. These considerations may cause some investors to maintain their equity exposure. If so, some of the risk-off pressure from the 5% 10-year yield may be mitigated.
For the near-term, muted equity returns are likely with continued volatility, especially leading up to, and perhaps beyond, the mid-term elections. We expect that growth stocks will outperform value.
High yields on new Treasury issues are great news for institutional investors such as endowment and pension funds and insurance companies and retirees wanting to lock in long-term income at these rates.
Investors seeking to take advantage of higher bond yields should consider whether the increased yield of the 30-year over the 10-year is worth the additional duration risk. Taxable investors should also consider the effect of income taxes which further reduce effective yields. Municipal bonds may be a reasonable alternative to Treasuries. (A separate account municipal bond manager we have worked with for many years has tailored a portfolio for a client with a 4.8% yield to worst and a short 5.07 year duration. The taxable equivalent of the 4.08% yield is 8.11% for an investor in the maximum federal tax bracket.)
Existing bond holders with inflation concerns can move down the yield curve to reduce duration risk. Adding diversification is also an option. Inflation-protected Treasuries (or TIPS) offer inflation protection. Emerging market debt provides higher yields than Treasuries owing to increased credit risk and are less sensitive to Treasury yield movements if denominated in local currencies rather than the Dollar. International sovereign and high-quality corporate debt are a consideration. Floating rate bonds offer income and flexibility. Investment-grade credit and high-yield bonds provide higher income (more credit risk), generally at shorter relative durations.
A consideration for all investors is your investment time horizon. It will help you determine the appropriate equity and fixed income allocations for their portfolios.
Other Perspectives
An alternative view is that rates may have simply adjusted to an equilibrium level, which is a new norm, balancing supply and demand with no further upward pressure on rates.
Yet another possibility is that continued expectations of growing inflation are a flawed outlook. The Fed is committed to reducing inflation to its 2% target. The inflationary effect of tariffs has worked its way through the system. The largest contributor to current inflation is the energy/Iran component which is expected to dissipate. The second largest component is what Goldman Sachs refers to as the cost of software and accessories.10 All are expected to fade. If inflation comes down, yields will follow and bond portfolio values will grow.
Perhaps the best estimate of future inflation is the breakeven point for TIPS, which are issued at real yields or interest rates lower than Treasuries of similar duration. If inflation is higher than TIPS interest rates, the principal value TIPS will increase, resulting in increased semi-annual interest payments. TIPS holders will breakeven when inflation makes up the spread between TIPS interest rates and Treasury yields.
Here are the current breakeven points:11
Author:
Charles Baldwin
, MBA
Treasury Bond Yields and Your Portfolio
Bonds: The Story Behind the Story
Publication date: October 8, 2026
The story is the increase in Treasury bond yields and the implications for stock and bond investors.
The impetus for this commentary is the swift uptick in the Treasury yield curve and the swift and substantial Treasury sell off. Both suggest a crisis of confidence in the ability of the U.S. to finance its ever-increasing long-term-debt without devaluing the dollar with persistent inflation. This is how we got here.
The yield curve plots the yield that bond investors demand for investing in U.S. Treasuries of various maturities at any point in time. Longer maturities carry more risk hence the upward slope of the curve. The following chart illustrates recent upward shifts in the curve.
These shifts tell us that investors have been increasingly unwilling to buy Treasuries at previous yield levels. They demanded higher yields to compensate for a multitude of risks including rising oil prices which add to already persistent inflation, increased uncertainty regarding the Middle East, and the cost to finance the interest on $32.4 trillion of outstanding Treasury bonds held by the public.1 The annual interest cost on that debt is $1.1 trillion dollars, which is greater than annual spending on defense or Medicare. The Treasury sells bonds and T Bills at public auctions, competing in the capital markets with other investment options. It has had to increase yields to attract buyers.
Another $7.7 trillion of Treasuries are owned by other parts of the federal government, e.g., the Social Security and Medicare Trust funds, bringing the total national debt to $40.1 trillion.
Persistent and rising inflation directly erodes adjusted real returns of fixed rate bond interest payments and the power of bonds held to maturity. To maintain real returns, investors demand higher nominal yields. Investors require higher returns to hold long-term bonds than short-term bonds. That yield spread is the “term premium”.
Bond prices move in the opposite direction of yield movements, and vice versa as yields move inversely with the direction of bond prices. Higher yields on newly issued bonds drive down prices of existing bonds. The longer the duration (think maturity) of a bond, the more sensitive its price is to yield movements. This “duration risk” is one reason yields are higher at the long end of the curve. Each shift in the yield curve drove bond portfolio values down. The 30-year yield spiked to over 5.3% in mid-August, the highest since 2007. Investor expectations of further yield increases and resulting value destruction triggered a sell-off of longer duration U.S. Treasuries.
On August 19, Treasury Secretary Scott Bessent announced plans to increase its Treasury buy-back program from $2 billion per month to $6 billion. The stated objective was to increase liquidity for older issues of 20 to 30-year Treasuries. (This might have been a reaction to the Treasury’s 20-year bond auction results on the 15th. See below.) The Treasury sells short-term T-Bills to finance this buy-back of longer duration bonds. A so called “Switch” strategy that lowers the interest expense of financing at least a small portion of the national debt.
Many observers thought the increased buy-back plan was an effort to manipulate yields at the long end of the curve. The plan increases demand for longer duration Treasuries from a price insensitive buyer (the Treasury) which can drive prices up and yields down. The immediate market reaction was a sharp drop in the 10-year yield and a .4% uptick in the NASDAQ. The benefit was short-lived as the yield on the 10-year rebounded the next day and equity markets were mostly flat over the next few weeks.2
The yield curve bump in the first few weeks of September was driven in part by Inflation reports. September’s Producer Price Index rose .4% for the month, bringing the 12-month increase up to 5.4%. The Headline Consumer Price Index also rose .4%. Another driver was oil prices. They soared to over $100 per barrel, signaling that inflation was likely to be higher for longer. Finally, stock and bond markets priced in the effect of one or two expected Fed rate hikes by year end. Investors called for higher yields.
September’s Treasury auctions proved the point.
On September 15th the 10-year yield closed at 5% for the first time in years. This resulted in a further bond sell-off.
On September 16th, as was widely expected, the Fed raised the Fed Funds rate by .25%. This is the discount rate that banks pay to borrow from the Fed. The instant reaction was a drop in the yield curve, and a stock market rally that ended a string of market losses. By the end of that week, the yield curve was higher than before the hike, due to continuing fears of higher inflation and further Fed rate hikes. The 10-year closed at 5.01%.6 Equity market returns were mixed. The Nasdaq gained .72%. The S&P 500 and the Dow were down .08% and 1.69% respectively.
The Fed has left the door open for additional rate increases. That has kept upward pressure on long-term rates for the rest of the month. Yields continued to climb when Core Personal Consumption Expenditures (PCE) inflation came in at 3%. Economic strength, as evidenced by strong retail sales, the Purchasing Managers Index (PMI) jumping to 58.4%, the highest since 2021, and the Atlanta Fed’s current GDP Now Model estimate for Q3 GDP growth at 3.7%, has kept inflation worries high, and given the Fed even more reasons to raise rates.
So good economic news, moved yields even higher. The month ended with Treasury yields at muti-decade highs: the 2-year at 4.87%, the 5-year at 5.07%, the 10-year at 5.31%, and the 30-year at 5.67%. The result was a global sell off of U.S. Treasurys in the last few weeks of the month.
Inflation and geopolitical worries are not the sole reason for rising yields. Supply and demand for debt financing also comes into play. When increased supply outpaces demand, yields rise. Currently, there is upward pressure on the front-end of the curve (three-month T-Bills) because of inflation. AI companies issued bonds to finance data center buildout which increased yields, especially in the two-to-ten-year belly of the curve. Persistent issuance of Treasury bonds (currently $10 billion per day) to finance current debt and future deficits will maintain the long-end term premium.7,8
What are the implications of an elevated yield curve for long-term equity and fixed income investors?
Our longer-term outlook for equities remains cautiously optimistic. One reason is the strong economy as outlined above. Other positive economic factors are a stable labor environment, continued high levels of hyperscaler data center CapEx investment and potential AI productivity gains. High and widening corporate earnings growth is another reason for optimism. Roughly 78% of the S&P 500 companies beat earnings estimates with positive revisions across industries.9 A flip side is that, if future earnings expectations are not met, markets will fall.
Valuations remain elevated, arguably supported by earnings growth. That said, we, like many others, have concerns about the sustainability of earnings at these levels.
That outlook notwithstanding, high bond yields present multiple headwinds for stock prices. The 10-year yield is the primary benchmark for consumer debt and influences longer term borrowing costs. The 30-year fixed mortgage rate has climbed above 7%. Higher interest rates depress consumer spending, hurt small businesses, and generally slow economic growth. Increased business borrowing costs reduce profit margins of public companies and reduce dollars available for expansion and share buy-backs.
The intrinsic value of a stock is the present value of its future cash flows. Financially, the discount rate used to calculate this value is heavily tied to risk-free interest rates (like the 10-year Treasury). When rates rise the present value of future earnings falls. This directly causes equity value or multiple compression, hitting high growth and technology sectors hardest.
Elevated discount rates also depress the value of other assets such as real estate, private credit and equity, even your neighborhood’s small businesses.
The 10-year yield is the risk-free rate against which investors measure the value of the equity risk premium. Historically, a 10-year rate of 5% or higher is the threshold at which many investors prefer bonds over stocks, judging that the excess return or premium potential from equities is not worth the risk. This “flight to quality” and the multiple compression (evidenced by lower prices for some stocks which have not had earnings revisions) are reflected in September’s equity index returns: Nasdaq 1.9%, S&P 500 -.45%, Russell 1000 -.82% and Russell 2000 -.69%. Tech stock earnings overcame the pressure of high yields. Year to date through 9/30 those indexes have posted double digit returns ranging from 12.06% to 15.6%.
If rising inflation and rising rate concerns are realized, then bond values will face interest rate risk, inflation-adjusted bond yields will be lower and buying power at maturity will be eroded. If history holds, equities are likely to be the best long-term inflation hedge over the next ten years. These considerations may cause some investors to maintain their equity exposure. If so, some of the risk-off pressure from the 5% 10-year yield may be mitigated.
For the near-term, muted equity returns are likely with continued volatility, especially leading up to, and perhaps beyond, the mid-term elections. We expect that growth stocks will outperform value.
High yields on new Treasury issues are great news for institutional investors such as endowment and pension funds and insurance companies and retirees wanting to lock in long-term income at these rates.
Investors seeking to take advantage of higher bond yields should consider whether the increased yield of the 30-year over the 10-year is worth the additional duration risk. Taxable investors should also consider the effect of income taxes which further reduce effective yields. Municipal bonds may be a reasonable alternative to Treasuries. (A separate account municipal bond manager we have worked with for many years has tailored a portfolio for a client with a 4.8% yield to worst and a short 5.07 year duration. The taxable equivalent of the 4.08% yield is 8.11% for an investor in the maximum federal tax bracket.)
Existing bond holders with inflation concerns can move down the yield curve to reduce duration risk. Adding diversification is also an option. Inflation-protected Treasuries (or TIPS) offer inflation protection. Emerging market debt provides higher yields than Treasuries owing to increased credit risk and are less sensitive to Treasury yield movements if denominated in local currencies rather than the Dollar. International sovereign and high-quality corporate debt are a consideration. Floating rate bonds offer income and flexibility. Investment-grade credit and high-yield bonds provide higher income (more credit risk), generally at shorter relative durations.
A consideration for all investors is your investment time horizon. It will help you determine the appropriate equity and fixed income allocations for their portfolios.
Other Perspectives
An alternative view is that rates may have simply adjusted to an equilibrium level, which is a new norm, balancing supply and demand with no further upward pressure on rates.
Yet another possibility is that continued expectations of growing inflation are a flawed outlook. The Fed is committed to reducing inflation to its 2% target. The inflationary effect of tariffs has worked its way through the system. The largest contributor to current inflation is the energy/Iran component which is expected to dissipate. The second largest component is what Goldman Sachs refers to as the cost of software and accessories.10 All are expected to fade. If inflation comes down, yields will follow and bond portfolio values will grow.
Perhaps the best estimate of future inflation is the breakeven point for TIPS, which are issued at real yields or interest rates lower than Treasuries of similar duration. If inflation is higher than TIPS interest rates, the principal value TIPS will increase, resulting in increased semi-annual interest payments. TIPS holders will breakeven when inflation makes up the spread between TIPS interest rates and Treasury yields.
Here are the current breakeven points:11
Concluding Comments
We have written about other events that have caused stock market corrections. There is always something. It just happens to be Treasury yields this time. Recoveries are as inevitable as the downturns. Equity investors with diversified portfolios should consider holding on to stocks and fixed income assets. Perhaps trim some equity exposure and increase fixed income diversification.
We don’t think the U.S. is going to default on its Treasury obligations and see no need for panic. But the markets are clearly worried about the combination of our ever-increasing debt and our ability to finance it at higher interest rates. We should be too. It may be too much to hope for, but our political bodies should face up to fact that our financial glide path is not sustainable.
Sources
1 “Monthly Statement of the Public Debt.” Fiscal Data, U.S. Department of the Treasury, fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding. Accessed 2 Oct. 2026.
2 David Lawder and Tatiana Bautzer, “Treasury Secretary Bessent Doubles US Long-Bond Buybacks in the Face of Surging Yields,” Reuters, August 19, 2026.
3 “US Treasury Auction Results, September 2026: 10-Year 4.834%.” The Vault Report, 12 Sept. 2026, thevaultreport.com/treasury-auctions/2026-09.
4 Jessica Coacci, “U.S. 30-Year Treasury Auction Shows Strong Demand,” Dow Jones Newswires via Morningstar, September 10, 2026. [morningstar.com]
5 Paulo Trevisani, “U.S. Treasury Auctions 20-Year Bonds at Highest Yield Since 1986,” Dow Jones Newswires via Morningstar, September 15, 2026. [morningstar.com]
6 YCharts. 10 Year Treasury Rate. YCharts, https://ycharts.com/indicators/10_year_treasury_rate. Accessed 21 Sept. 2026.
7 Bloomberg, “Why High Yields on Treasury Bonds, Government Debt Look Like the New Normal,” September 17, 2026.
8 Morgan Stanley Investment Management, The BEAT: Quarterly Global Market and Asset Allocation Guide, Q3 2026 (September 2026). [morganstanley.com]
9 “Global Asset Allocation: The View From Europe.” T. Rowe Price, 17 Sept. 2026, www.troweprice.com/financial-intermediary/es/en/thinking/articles/2026/q3/global-asset-allocation-view-from-europe-september-2026.html. Accessed 22 Sept. 2026. [1]
10 Goldman Sachs Investment Research. Weekly Market Update. 31 Aug. 2026, Goldman Sachs.
11 Street Stats Research, “TIPS Yield Curve – Treasury Inflation Protected Securities Interest Rates,” September 21, 2026.
Author:
Chuck Baldwin, MBA, CLU, ChFC
Co-Founder & Financial Advisor
Baldwin & Clarke Advisory Services, LLC
Email: chuckbaldwin@baldwinclarke.com
For informational purposes only and is not investment, financial, legal, or tax advice. References to investments or strategies are not recommendations to buy, sell, or hold any security. You should consult your own financial, legal, tax, or investment professionals before making any decisions.