Higher For Longer

The U.S. bond market just closed out its worst quarter of the century, with a steep Treasury selloff driving yields to levels not seen in more than two decades. Traders are bracing for a higher‑for‑longer interest‑rate environment, fueled by resilient economic data, persistent energy‑related inflation concerns, and mounting federal debt. 

Even though a mix of cooler‑than‑expected inflation and softer employment data effectively took an October rate hike off the table, markets continue to price in a December increase, reflecting investors’ belief that the Federal Reserve remains committed to tamping down inflation quickly. 

Oil prices are holding steady, but geopolitical risks are rising. The Wall Street Journal reports Iran has become more adept at striking oil shipments in the Strait of Hormuz, prompting some companies to pay crew members up to $25,000 to transit the passage. That means more barrels are still leaving the Gulf—but at significantly higher risk. Meanwhile, Bloomberg quotes Saudi Aramco’s CEO warning that global crude inventories are “scarily thin.” 

Bond Yields Surge 

The benchmark 10‑year Treasury yield jumped 87.1 basis points in the September quarter, the sharpest quarterly rise since 1994. It recently climbed another 6 bps to 5.34 percent, its highest level since 2002, just one day after breaking through its 2007 peak. The 30‑year yield rose to 5.67 percent, a 24‑year high. 

What’s striking is how little this bond‑market turmoil has spilled over into broader risk assets. Despite a dramatic repricing in rates, the S&P 500 remains near record highs. Investors appear to interpret higher yields as a sign of economic strength rather than a warning of deteriorating conditions. 

Why Rate Expectations Are Easing 

Expectations for additional rate hikes this year have been fading—and not because of immediate inflation pressures from oil or refined products. Instead, stress in higher‑risk corners of the fixed‑income market may be the more important factor. 

Interest rates tend to rise until something in the economy breaks. Once a vulnerable sector falters, credit supply tightens, reducing issuance and easing upward pressure on yields. Less supply means higher bond prices—and lower yields.

Other Factors: 25 Years of Red Ink

In other news, the U.S. government closed fiscal year 2026 with a budget deficit of $1.992 trillion, marking the 25th consecutive year in which federal spending exceeded revenue. This current deficit widened by roughly 12 percent from the $1.775 trillion shortfall recorded in 2025, making it the third-largest annual deficit in U.S. history, surpassed only by the pandemic-era deficits of 2020 and 2021.

The latest Treasury data highlights the growing fiscal pressures facing Washington. While both government revenue and spending reached record levels in 2026, expenditures once again out-paced collections. The United States has not recorded a budget surplus since 2001!

Federal spending remains concentrated in three major categories:

• Social Security: Nearly $1.7 trillion, maintaining its position as the federal government’s largest expenditure.

• Medicare: Almost $1.1 trillion, reflecting continued growth in health-care-related costs.

• Net Interest Costs: Exceeded $1 trillion for the first time, underscoring the rising burden of servicing growing national debt.

Overall, the federal government paid more than $1.3 trillion in interest expenses during the year. Meanwhile, the national debt surpassed $40 trillion in 2026 and has more than doubled over the past decade. Obviously, this is intensifying concerns about long-term fiscal sustainability.

The rapid expansion of federal debt has become a growing concern for investors and policymakers. Increased borrowing needs have contributed to higher Treasury yields, with both 10-year and 30-year Treasury rates recently reaching their highest levels in more than two decades.

Treasury Secretary Scott Bessent has argued that stronger economic growth is essential for managing the nation’s debt burden. President Donald Trump, meanwhile, has pointed to tariffs as a needed tool for increasing federal revenue and reducing budget deficits.

Fiscal year 2026 reinforced a trend that has persisted for a quarter century: federal spending continues to out-grow government revenue. With annual deficits approaching $2 trillion, interest costs exceeding $1 trillion, and the national debt climbing beyond $40 trillion, restoring long-term fiscal balance remains one of the most significant economic challenges facing the United States.

PUBLISHED OCTOBER 2026