Higher Rates, Bond Markets & the U.S. Debt Debate
Market Recap for the September 2026
Market Recap
Historically, September is, on average, the worst month for the S&P 500, with an average loss of 1%. This September was fairly weak, with the S&P 500 only gaining 0.35% for the month. Developed international stocks and small-cap stocks both lost over 2% for the month. The big loser for the month of September was the bond market, with the Barclays Aggregate bond index losing a bit more than 2% for the month.
“September lived up to its reputation as a challenging month for markets.”
“When interest rates rise, bond prices fall—but higher yields can create new opportunities for investors.”
Rising Rates and Bond Prices
Bond prices have an inverse correlation to bond yields, meaning when interest rates rise, bond prices go down. Consider a simple example: let's assume I purchase a 5-year bond that pays 4.50% interest. I will make 4.50%, assuming I hold the bond for 5 years. However, if market interest rates go up and new 5-year bonds are being issued at 5%, I'm still stuck holding the 4.50% bond. Now, I can sell that bond in the market, but who would pay full price for a 4.50% bond when they could go to the government and buy a freshly issued 5% bond? This is exactly what happened in September: the 10-year yield rose from 4.79% to 5.23% by the end of the month.
There are a few key reasons for the rise in interest rates. First off, the Federal Reserve increased the short end of the yield curve by 25 basis points. The interest rate hike doesn't directly affect longer-term yields like the 10-year; however, when the Fed starts hiking, that can be taken as a signal that rates are going up across the board. The war in Iran is keeping oil prices high, which keeps inflation high, which pushes interest rates up. This is a sensible feedback loop. Again, consider a 4.50% bond. That might be a good investment if inflation is only 2%, but if inflation ends up being 3%, the bond loses some purchasing power. In turn, investors demand higher rates, they sell bonds, and yields rise.
Who Owns U.S. Debt?
Most readers are probably aware of the level of our national debt, which is quite large (to put it mildly). A narrative I have been hearing through various outlets is that nobody wants our debt, and therefore we won't be able to borrow and the US will collapse. This story might sound like it has some truth to the average reader, and it has a scary ending. However, it's important to remember who is buying US government debt. Contrary to popular belief, we don't owe all of this money to our neighbors. Nearly 57% of US debt is held by US institutions (such as mutual funds, pension funds, insurance companies, etc.). In other words, you are the holder of the government debt. It is true that foreigners hold a portion of US debt, but they are far from the largest holder. China has been reducing its holdings of US debt, and it only holds about 2% of US debt.
“Contrary to popular belief, the majority of U.S. debt is held by American institutions—not foreign governments.”
“At more than 5.20%, 10-year Treasury yields are offering investors an opportunity not seen since 2007.”
The Bottom Line
The bottom line for higher interest rates is that there are portfolio decisions to be made now that rates are higher. The 10-year yield at over 5.20% means that default-risk-free government bonds are now paying more than they have since 2007. This is something that investors would have killed to have in the 2010s. The one significant risk is that inflation comes in persistently higher for the next ten years, which would erode the purchasing power of these higher yields.
The commentary in this blog is for informational purposes only and should not be taken as personalized investment advice
Sources: S&P Global Ratings, CME Group. AI Infrastructure Investment: S&P Global Ratings' "AI Infrastructure Investment To Exceed $1.3 Trillion By 2027" report (August 27, 2026); Fed Policy Expectations: CME Group CME FedWatch Tool. Data are as of September 1, 2026.
