October Monthly Market Update

“When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.”

– Thomas Sowell, Economist

The recent media discourse surrounding the rising U.S. interest rates on the longer end of the yield curve has reached a fever pitch, as the 10-Year U.S. Treasury yield recently reached the highest level in 24 years. It is an important global benchmark interest rate because longer-term interest rates are more controlled by the market’s opinion of growth and inflation than the Federal Reserve’s, but the gloomy tone clouds the conversation by implying it is inherently a bad thing. There are nuances to what these rising long-term rates might mean for the U.S. economy. Comparing current rates to other points in history is not really that helpful once you realize that U.S. interest rates had been in a 40-year super-cycle of declining rates. 2022 broke that trend. Hard to reasonably judge today’s interest rate moves using historical frameworks that no longer persist. After being told by the Federal Reserve that inflation was transitory and everything was fine, the market is finally beginning to properly price in more persistent inflation, rampant fiscal spending/kicking the can, etc. That is not inherently a bad thing, but it is a warning.

The more important conversation should be where interest rates are relative to economic growth, which can be either positively or negatively correlated. In the positively correlated relationship, higher economic growth means more demand for borrowing. More borrowing begets even faster economic growth. Faster economic growth can lead to modest inflation, so bond investors desire more compensation. That is what seems to be happening in the U.S. right now. Nominal U.S. GDP (i.e. inflation included) has grown +6.3% over the last year, as of Q2 2026. The current 10-year Treasury rate sits at 5.28% at the time of writing. When nominal economic growth exceeds longer term interest rates, there remains a path to sustainability for a growing fiscal debt burden. That doesn’t mean debt sustainability automatically happens, but the runway is notably longer and with more offramps. Additionally, the U.S. is the only country with a true ace in the hole. The U.S. Dollar is the world’s reserve currency with the deepest bond market, most global trade happens in Dollars, and we are the world’s largest consumer economy. Ignoring those structural advantages, what would it look like if higher interest rates are not a result of higher economic growth expectations? Look no further than France right now.

France’s 10-Year government bond yield is also at its highest point (4.93%) since 2002. Their debt-to-GDP ratio has climbed notably above 100% and they have a sizeable annual budget deficit. The U.S. has that backdrop too. The main difference is that their growth is relatively weak at +1.94% year-over-year, well below their long-term government bond yield. They have few options and their position is precarious. France has six months to go before what looks to be a generation defining election in April. If they cut spending, the current protests probably widen (which affects growth and spending). If they keep spending, they’ll borrow at increasingly higher rates. If they raise taxes, they’ll risk even lower economic growth. On top of that, French bond investors have an additional risk to price in that U.S. investors don’t.

Unlike in the U.S., France’s pensioners (~25% of their national budget) are effectively senior claimants to the country’s Treasury revenues. It is worth watching how this unfolds for France, but the U.S. economy is in a better position to absorb higher rates for the time being. There are additional reasons for U.S. economic optimism.

First off, many consumers are locked into low mortgage rates, shielding them from the effect of higher rates on one of their largest expenditures. The 30-year fixed mortgage is yet another distinct advantage for the U.S. that most of the world does not have. Sure, it might be harder to move now, but that’s more often an opportunity cost not a forced cost like an adjustable-rate mortgage. Secondly, the biggest issuers of debt (AI companies) are still profitable, have strong balance sheets, and are less sensitive to interest rates than most. These are not companies borrowing to stay afloat. They are borrowing to innovate. Lastly, while inflation remains a concern for the bond market, much of that inflation is currently being driven by energy costs. August data showed inflation grew +3.4% year-over-year, but fuel oil and gasoline increased +52% and +27%, respectively, over the same period. Any resolution of the Iran war will bring inflationary relief, and some pressure off the Federal Reserve.

To be clear, none of this means that there will be no economic pain to come from higher interest rates. That would be an ignorant statement. Rather, it means the U.S. still has options and our economy can likely handle the increases we’ve seen recently. Honestly, the market could use a re-rating of what it considers “normal” long-term interest rates. The last 10-15 years of ultra-low interest rates have been an aberration in history, not the norm. Admittedly, the concern about rising rates is understandably palpable, but many seem to be going out of their way looking for evidence that the sky is falling. Constant worrying does investors no good and increases the chance that investors make an emotional decision out of fear.

Bloomberg’s Joe Weisenthal is fond of saying something to the effect of, “In punditry, it pays to be pessimistic. In markets, it pays to be optimistic.’” People don’t search out articles that say, “everything is fine.” When the economy gets more volatile, people look for signals that they should panic. The media will gladly feed the public a healthy dose of what they want to hear, as long as people keep clicking. Yet, the current economic reality for the U.S. is more of nuanced trade-off that acknowledges the challenges that rising interest rates can pose to an economy while also recognizing that our economy is far more resilient than anyone could have imagined amidst the constant and complex challenges the world has faced since the beginning of 2020. Bond market warnings should never be ignored, regardless of U.S. structural advantages, but neither should an economy’s resilience. The U.S. is still in a better position relative to most countries, and investors are in the business of relative comparison, not absolutes.