Fixed Income Update
U.S. Treasury yields rose again this week, with nearly every benchmark maturity trading near or above 5%.
For weeks, if not months, we have highlighted the forces driving government borrowing costs higher: oil near $100 per barrel, sustained AI-related investment, and widening U.S. budget deficits that continue to add to a record $40 trillion debt load. At the same time, the Federal Reserve remains focused on bringing inflation - which has exceeded its target for more than five years - back under control.
The selloff accelerated, this week, after the S&P U.S. purchasing managers’ indices reached their highest levels since 2022, sparking concerns that the economy may be overheating. The report showed firm output and demand, while order backlogs increased at their fastest pace since 2022. Wage pressures also intensified, firms reported difficulty finding qualified workers, and supply-chain disruptions became the most widespread since 2022. Although the economy’s resilience has been apparent for months, the PMI data reinforced expectations for stronger growth. This week’s rise in yields therefore appears to reflect improved growth expectations and a tighter path for Federal Reserve policy, rather than increased concern about long-term inflation. Of the 20-basis-point increase in the five-year Treasury yield this week, 18 basis points came from higher real yields.
Geopolitical developments and hawkish comments from Federal Reserve officials also added to the pressure on bonds. Iran’s president delivered a defiant speech at the United Nations, further reducing hopes for a swift resolution to the war. Fed Governor Michael Barr said his base case is that “further policy adjustments are likely to be needed.” More notably, New York Fed President John Williams, arguably the most dovish official this year, said another rate increase this year is “a reasonable way to think about it.”
Soft demand at Treasury auctions also pushed yields higher. Wednesday’s five-year auction tailed by 3 basis points and priced above 5% for the first time since 2007. Thursday’s seven-year auction tailed by nearly 1 basis point and priced at its highest yield since the maturity was reintroduced in 2009. Yields were modestly lower in early Friday trading as of this writing, but the entire curve beyond five years remained above 5%.
The rise in borrowing costs extends beyond the United States. Other major economies face similar pressures, including energy disruptions related to the Iran war and elevated government borrowing. On Thursday, Japanese government bond yields climbed to levels last seen in 1996, while yields in the United Kingdom and Germany remained near some of their highest levels this century. According to Bloomberg data, the average yield on global government debt is just under 4%, its highest level since 2007. In the $32 trillion U.S. Treasury market, the average yield is 5.05% - near the 2023 high of 5.12% and the previous peaks reached in 2006 and 2007.
For fixed-income investors, yields near 5% may present a more compelling income opportunity than the near-zero yields that prevailed for much of the 2010s.
As of September 25, 2026
|
Index |
Current |
Last Week |
Wk Chg |
Last Year |
Yr Chg |
|
Tax-exempt MMF |
2.97% |
2.76% |
.21% |
2.67% |
.30% |
|
Taxable MMF |
3.83% |
3.71% |
.12% |
4.12% |
-.29% |
|
|
|
|
|
|
|
|
2-Year Treasury |
4.91% |
4.75% |
.16% |
3.66% |
1.25% |
|
5-Year Treasury |
5.06% |
4.86% |
.20% |
3.76% |
1.30% |
|
10-Year Treasury |
5.23% |
5.00% |
.23% |
4.17% |
1.05% |
|
30-Year Treasury |
5.53% |
5.33% |
.20% |
4.75% |
.78% |
|
5-Year Exp. Inflation |
2.36% |
2.34% |
.02% |
2.48% |
-.12% |
|
|
|
|
|
|
|
|
2-Year Municipal** |
3.51% |
3.06% |
.45% |
2.30% |
1.21% |
|
5-Year Municipal** |
3.77% |
3.36% |
.41% |
2.39% |
1.37% |
|
10-Year Municipal** |
4.22% |
3.89% |
.33% |
3.09% |
1.13% |
|
30-Year Municipal** |
5.20% |
4.98% |
.22% |
4.51% |
.69% |
|
|
|
|
|
|
|
|
Fed Funds |
4.00% |
4.00% |
.00% |
4.25% |
-.25% |
|
Prime Rate |
7.00% |
7.00% |
.00% |
7.25% |
-.25% |
|
Dollar*** |
$101.01 |
$100.22 |
$0.78 |
$98.55 |
$2.45 |
|
CRB |
$423.32 |
$422.55 |
$0.77 |
$303.35 |
$119.97 |
|
Gold |
$4,265.80 |
$4,390.70 |
-$124.90 |
$3,738.70 |
$527.10 |
|
Crude Oil |
$94.00 |
$100.30 |
-$6.30 |
$64.98 |
$29.02 |
|
Unleaded Gasoline**** |
$3.46 |
$3.53 |
-$0.07 |
$1.87 |
$1.59 |
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon
Stock Market Update
US equities were choppy this week, posting mixed results through Thursday’s close. Strength in AI-related stocks and lower oil prices supported gains for the Nasdaq Composite and S&P 500, while strong economic data and inflation concerns pushed bond yields higher. Although rising bond yields weighed on sentiment, both the Nasdaq and S&P 500 traded within 1% of their all-time highs as of Friday morning.
Despite renewed Middle East hostilities over the weekend, oil prices declined this week on constructive diplomatic and supply developments. West Texas Intermediate crude traded near $92/barrel Friday morning. Early in the week, President Trump expressed openness to meeting with the Iranian president and noted US officials had held a positive meeting with their Iranian counterparts. By late week, reports suggested the two sides were considering a phased agreement, beginning with the reopening of the Strait of Hormuz and the removal of economic blockades. The conflict remains unresolved, but signs of diplomatic progress have helped to lower oil prices give a boost to sentiment.
While oil prices moved lower, bond yields moved sharply higher. The US 10-year Treasury yield saw levels last seen nearly 20 years ago; it touched 5.2% Friday morning. The primary catalyst for this week’s move higher in bond yields was September’s hotter-than-expected composite flash PMI, which rose to 58.4 from 56.1 m/m, above the 56.0 consensus; input cost inflation was a worrying takeaway. The data reinforced concerns that strong growth could sustain inflation and necessitate further rate hikes from the Federal Reserve (Fed). As of Friday morning, the CME FedWatch Tool showed a 66.4% probability that the Federal Reserve would raise rates at next month’s meeting, up from 57.6% a week earlier. Hawkish Fed commentary added to the yield pressure this week. This week’s Fedspeak included Fed Governor Michael Barr stating that “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
AI-linked stocks showed well this week, supported by Monday’s rally which was driven in part by continued momentum behind Meta Platforms’ (META) AI-agent application, Muse. The application reached the top spot in both the Apple and Google Play app stores. Enthusiasm for AI agents lifted agentic-AI infrastructure companies this week with Advanced Micro Devices (AMD) and Intel (INTC) gaining 12.4% and 17.3%, respectively, through Thursday’s close, while META rose 16.9%. The Nasdaq Composite gained approximately 2.3% Monday, and AMD became the latest company to surpass $1 trillion in market capitalization.
Elsewhere, investors focused on Thursday’s summit between Presidents Trump and Xi Jinping. Discussions covered AI, the Iran conflict, and tariffs. Initial takeaways were limited, though reports indicated that additional details on US-China negotiations would be released Monday. The two sides agreed to extend their trade truce by two months. Trump and Xi are expected to meet again at the APEC conference in November and the G20 summit in December.
Looking ahead, some of the key issues investors are monitoring are the likelihood of further Fed tightening, the duration of elevated yields, inflation, and whether the US economy can continue to absorb the effects of higher borrowing costs. Third quarter earnings season is right around the corner as well. Expectations are for 29.1% earnings growth for the S&P 500.
As of September 24, 2026
|
Index |
Current Week |
Month of Sep. |
YTD |
|
Dow Jones Industrial Avg. |
-0.64% |
-3.28% |
8.12% |
|
S&P 500 |
0.71% |
0.33% |
13.51% |
|
Nasdaq |
1.58% |
2.22% |
16.42% |
|
MSCI EAFE |
-0.74% |
-3.42% |
10.34% |
|
Russell Mid Cap |
-0.22% |
-2.99% |
13.23% |
|
Russell 2000 |
-0.86% |
-3.99% |
15.22% |
