Grace Under Pressure
Ocotber 9, 2026
Equity markets both domestic and international experienced a volatile September. Despite this volatility and the pressure from the bond market, domestic equity markets have generally held up while international and debt markets deteriorated. Throughout the month, investors balanced ongoing inflation concerns, higher energy prices, and a rise in interest rates. The Federal Reserve’s decision to raise interest rates at its September meeting was perhaps the title event of the month.1 As the first increase in over three years, it marked a notable shift in the policy backdrop. This decision has also reinforced the importance of inflation in determining the path of monetary policy heading into the final months of the year.
The debt market certainly felt the pressure as the Federal Reserve reassessed its outlook for inflation with this change in policy. The 10-year Treasury yield moved to 5.281% during September, reaching its highest level since 2002.2 These higher Treasury yields are impactful because they raise borrowing costs for consumers and businesses while also increasing the discount rate applied to future earnings. So, cash and short-duration investments can benefit from these higher yields, but unfortunately when these yields increase, the pressure builds in nearly every other asset class.
Despite the pressure from higher interest rates, U.S. equities demonstrated considerable resilience. The S&P 500 returned -0.35% for the month, and NASDAQ returned +1.93%. Technology and AI-related stocks continue to be strong contributors here, especially for NASDAQ as it’s weighted heavier in these technology-oriented companies. The simultaneous increase in Treasury yields and oil prices has historically had a more negative effect on domestic equities.3 So, while these aren’t record breaking returns for the month, the resilience of equities has been notable.
International markets have similarly been influenced by the global rise in bond yields and energy prices. Ideally this tighter monetary policy will contribute to a strengthening U.S. dollar, but international markets have not been spared the other effects that come with the higher-for-longer U.S. rate environment. Developed internationals sold off throughout the month, while emerging markets experienced consistent volatility. Developed markets returned -3.00% and emerging markets returned -0.65%, as tracked by the MSCI EAFE Index and the MSCI Emerging Markets Index, respectively. Looking across the ocean, it is evident that the rise in yields has extended well beyond our borders. Notably, Japan’s 10-year government bond yield reached approximately 3.12%, its highest level since 1996.4
Unfortunately, with inflation still above the coveted 2% target, it leaves room for additional monetary tightening. Seemingly aware of this gap, market participants are pricing in additional rate raises as early as December of this year. Investors will be closely watching upcoming employment and inflation as the next Fed meeting will take place at the end of October. In the press conference following the last meeting, Chairman Kevin Warsh noted, “I don’t believe that the two parts of our mandate, price stability and full employment, are working at cross purposes over the medium term”.1 So, the FOMC appears to be confronting an unusual combination of economic resilience related to strong labor markets and renewed inflationary pressure, which is the price stability that he was referring to.
All said, the elevated treasury yields, persistent inflation, and additional potential monetary tightening create a challenging backdrop for both fixed income and equity markets. As the fourth quarter kicks off, markets remain highly sensitive to incoming economic data, with the direction of interest rates likely to remain one of the most important drivers of asset-class performance through year-end.
1https://www.federalreserve.gov/monetarypolicy/fomcpresconf20260916.htm
2https://www.cnbc.com/2026/10/02/treasury-yields-bonds-nonfarm-payrolls.html
3https://www.wsj.com/finance/investing/oil-prices-and-bond-yields-keep-rising-putting-a-damper-on-stocks-0dd33e36
4https://www.cnbc.com/2026/09/24/japan-jgb-bond-yield-treasurys.html
This commentary is provided for informational purposes only and reflects general market observations. It does not constitute individualized investment advice or a recommendation to buy, sell, or hold any security. Past performance is not indicative of future results.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
Bloomberg’s U.S. Aggregate Total Return Value Unhedged Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS(agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg's World Interest Rate Probability (WIRP) function is a chart that shows the probability of different interest rates for the US benchmark rate. The chart is based on interest rate caps and floors, as well as options on Treasury futures.
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