Market Update October 15, 2026
Probably the most notable news about the financial markets in the recently completed 3rd quarter was how difficult it was for bonds. The yield on the 10-year Treasury bond hit 5.29%, up from 4.18% at the beginning of the year. This means bond prices went down due to the inverse relationship between yields and prices, pushing this yield to the highest it has been since 2002. The result is that borrowing costs are near the highest they have been this century, including the interest rate on home mortgages. A continued rise in yields will eventually begin to weigh on economic growth, though for the moment the economy remains resilient. For historical perspective, the 10-year Treasury yield was well above 5% the vast majority of the time between the late 1960s and the turn of the century.
There are a couple of primary contributors to the weakness in bonds and rise in yields. For starters, there has been a huge amount of debt issued by the United States and other developed economy nations, as well as companies investing in artificial intelligence. When the supply of a particular good begins to exceed demand – in this case, bonds – prices fall. At this time there is no end in sight to the ongoing issuance of debt. Also contributing to the rise in bond yields is persistent inflation. With the war in Iran still continuing, energy prices remain elevated. The huge rise in diesel prices is of particular concern as this will increase the cost of goods across the economy. An end to this conflict would greatly improve the outlook. At some point, the rise in bond yields should result in higher demand, stabilizing bond prices. Investors may be inclined to shift assets away from stocks and into bonds, putting pressure on stocks.
In the meantime, investors’ risk appetite for technology stocks remains alive and well. As a testament to the continued gulf between technology stocks and everything else, the tech-heavy S&P 500 index was up 2.3% in the 3rd quarter. By comparison, the S&P 500 equal weighted index was down 1.9%. Small company stocks fared much worse, with the S&P 600 down 7.9%. This was likely attributable to smaller companies being more reliant on debt and thus more vulnerable to the higher borrowing costs. Foreign stocks were about flat in the quarter, with the MSCI EAFE index of established foreign market stocks up 0.8% and MSCI Emerging Market index down 0.4%. Bonds, as noted, had a rough quarter. The Bloomberg U.S. Aggregate index was down 3.5%.
With regards to the rising supply of debt, JPMorgan Chase has estimated that $4.1 trillion of AI-related debt will be issued through 2030. My ears tingle when I hear about debt in the trillions, as this conjures memories of an article in the N.Y. Times back in 2005 entitled “The Trillion-Dollar Bet”. This article highlighted a growing risk in the U.S. housing market as millions of people took out adjustable-rate mortgages to fund home purchases on hopes that mortgage rates would fall. Collectively, these mortgages tallied around $1 trillion. Mortgage rates did not fall, and two years later the housing bubble peaked and eventually burst, leading to the Global Financial Crisis of 2008. With this in mind, I believe investors should tread cautiously in the tech sector. Hopefully all of this investment in AI will prove to have been a good use of capital.
Lost in all the excitement this year is that there is an election right around the corner. When looking at the four-year Presidential cycle and the financial markets, the 4th quarter of a mid-term election year has historically been strong and marked the beginning of what has traditionally been a positive three-quarter period. Then again, the 3rd quarter typically has been weak for the S&P 500, and it didn’t follow the usual pattern this year. While bonds have had a difficult year so far, interest rate risk is lower now, making them the most attractive they have been for quite some time.
As always, do not hesitate to reach out to me if we can be of help or if you have any questions.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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