2026 US Treasury Rate Rise: Causes, Global Impact & Equity Outlook

As of September 2026, interest rates have once again taken center stage in financial news, driven by several key factors. Long-term rates, specifically 10-year and 30-year US Treasury rates, are nearing levels not seen in two decades. The US national debt recently surpassed $40 trillion, sparking concerns about its impact on the economy and bondholders. The Federal Reserve has a new chair, Kevin Walsh, whose influence on monetary policy is being closely watched, and Treasury Secretary Scotty Besson has been particularly vocal about interest rates.

This article will delve into US Treasury rates, their performance in 2026, and the underlying reasons for their prominence. It will also extend the discussion to global government bond rates to determine if this is a worldwide phenomenon and explore the nuanced relationship between interest rates and stock prices.

Government Borrowing and US Treasury Rates

Governments borrow money primarily because their tax revenues often fall short of their expenditures. They issue bonds as a common method of borrowing. The rates on these government bonds reflect not only investor concerns about the government's default risk but also the currency in which the debt is denominated, the expected inflation in that currency, and the stability of its purchasing power.

US Treasury rates are a crucial benchmark because the US Treasury remains the largest single government borrower globally, despite the growth of other government bond markets.

US Treasury Rate Performance in 2026

Throughout 2026, US Treasury rates across various maturities (3-month, 2-year, 5-year, 10-year, 20-year, and 30-year) have generally drifted upwards. While the 2-year rate showed some divergence, the overall trend has been an increase. This upward movement has been observed across the four Federal Open Market Committee (FOMC) meetings and since Kevin Walsh assumed the Fed chair position.

The yield curve, which was mostly upward sloping at the beginning of 2026 (with the 2-year rate slightly lower than the 3-month rate), has evolved. By August 2026, it had become a more conventional upward-sloping curve, with a steeper slope between the 10-year and 20-year rates. While rates have risen enough to capture attention, the increase has not been as dramatic as in previous periods like 2022.

Historical Context of US Treasury Rates

To put the 2026 rate changes into perspective, examining US Treasury rates since 1962 reveals several patterns:

• Co-movement: The 3-month, 10-year, and 30-year rates tend to move together; when one goes up, they all generally go up, and vice versa.
• Volatility: The 3-month rate is typically more volatile than the 10-year or 30-year rates.
• 30-year Treasury History: The 30-year Treasury bond has a more intermittent history compared to the 10-year, which has existed for over a century.
• Historical Relationship: Historically, the 30-year rate has been higher than the 10-year rate, which in turn has been higher than the 3-month rate.

Looking at 2026 from a longer-term perspective, current rates are higher than they have been in the last 10-15 years (since 2008). However, compared to the broader historical context stretching back to the 1960s, current rates are closer to the norm. The period from 2008 to 2021, characterized by near-zero 3-month rates and 10-year rates dipping below 2% (and even 1%), might be considered the "abnormal" period. Therefore, while rates are high relative to the post-2008 era, they are not necessarily abnormally high in a much longer historical view.

Drivers of Interest Rates

The 10-year risk-free rate in any currency is fundamentally composed of two elements: expected inflation and a real interest rate.

• Expected Inflation: Higher expected inflation leads to higher intrinsic interest rates.
• Real Interest Rate: Higher real interest rates also lead to higher intrinsic interest rates. Real interest rates are partly influenced by real economic growth; higher real growth typically increases demand for borrowing, pushing up real interest rates.

While market interest rates are determined by supply and demand, these fundamental components should underpin the 10-year T-bond rate.

Measuring Expected Inflation

A market-based estimate of expected inflation for the US dollar can be derived from the US Treasury market. By comparing the 10-year US Treasury rate with the 10-year US Treasury Inflation-Protected Securities (TIPS) rate, the difference provides an expected inflation number.

Since 2003, when TIPS began trading, this expected inflation number has fluctuated. It decreased in the last decade and rose in 2022. In 2026, expected inflation has nudged up but has not dramatically shot up, unlike the actual inflation jump seen in 2022. This suggests that markets are not reacting with the same level of alarm as some inflation experts or "fearmongers."

Intrinsic vs. Market Rates

An intrinsic T-bond rate can be estimated by adding the actual inflation rate and actual real GDP growth (as a proxy for the real interest rate). Historically, this intrinsic rate has done a good job of explaining movements in the 10-year bond rate:

• 1970s: Rates jumped due to soaring inflation.
• 2010-2021: Rates were low due to low inflation and low real growth (with the Fed playing a marginal role).
• Since 2022: Rates have increased because inflation returned significantly in 2022 and has remained elevated, keeping the intrinsic risk-free rate high.

As of September 2026, the 4.75% T-bond rate is closer to the computed intrinsic risk-free rate, indicating a convergence. Risk-free rates have risen partly because inflation has stabilized around 2.5% to 3%, and this is being factored into the T-bond rate.

Global Government Bond Rates

The increase in interest rates is not confined to the US. Examining rates in other major currencies reveals a broader trend:

• Major Currencies: In 2021, rates in currencies like the British pound, Euro (represented by the German 10-year bond rate), Japanese yen, Australian dollar, and Canadian dollar were at historic lows, with some even negative (e.g., German Euro bond rate at -0.16%). Over the last five years, and particularly in 2022, rates in every single one of these currencies have jumped. In 2026, all these government bond rates have continued to rise.
• Japan's Shift: The shock effect is particularly pronounced in Japan, which has experienced low rates (below 1%) for nearly 30 years. Current 10-year rates represent a new economic order for Japanese investors.
• Emerging Markets: The trend is different in some emerging market currencies. For example, in the Chinese yuan, Indian rupee, Brazilian real, and South African rand, rates have generally decreased over the last five years relative to 2021, with the exception of the Brazilian real which saw a jump. In 2026, three of these currencies saw rate increases, but China experienced a decrease. This suggests a disconnect between developed and emerging market currencies.

This convergence of government bond rates globally is impacting the "carry trade," a strategy where investors borrow in low-interest-rate currencies (like the Japanese yen historically) and invest in higher-interest-rate currencies (like the US dollar). As rates converge, this strategy becomes less attractive.

Ripple Effects: Corporate Bonds and Equities

Changes in government bond rates have ripple effects across financial markets, most directly impacting corporate bond rates and, more nuancedly, equities.

Corporate Bond Rates

When companies borrow money, they start with the risk-free rate in that currency (typically the government bond rate) and add a default spread. For US dollars, the US Treasury rate has historically served as the default-free base. However, after the US lost its last AAA rating in 2025, there's now some perceived default risk in US government bonds.

Analyzing default spreads over the US Treasury rate for different ratings classes in 2026 shows:

• Higher-Rated Bonds: Default spreads for AAA-rated bonds have either stayed the same or decreased.
• Lower-Rated Bonds: Default spreads for high-yield bonds (Triple C and lower) have widened, indicating a repricing of risk.

Since the US Treasury rate increased from 4.18% to 4.75% in 2026, companies now face a higher base rate for borrowing. This, combined with changes in default spreads, has generally increased the cost of debt for corporations.

For bond investors, this increase in rates has led to a drop in bond prices. For example, a 10-year US Treasury bond saw its price drop by about 4.5% in 2026. While coupons provide some return, the overall return for a 10-year US Treasury bond holder has been slightly negative. For high-yield bonds, the price effect has been more dramatic (around an 11% drop), resulting in a positive but low return given the associated risk. This inverse relationship between interest rates and bond prices is a direct consequence of present value calculations: higher discount rates (interest rates) reduce the present value of fixed future cash flows.

Equities

The relationship between interest rates and equities is more complex because the cash flows of a company are not fixed and can themselves be affected by interest rate changes.

Impact on Cash Flows:

• Revenues: If interest rates rise due to higher inflation, companies with strong pricing power might be able to pass on increased costs to customers, insulating their revenues.
• Operating Income: The impact on operating income depends on the company's cost structure. Companies with low input costs might be less affected by inflation, while others could see their gross, operating, and net margins change significantly.
• Interest Expense/Income: Higher interest rates increase interest expenses on new debt but also increase interest income on cash and marketable securities. The net effect depends on a company's debt levels.
• Reinvestment: If rates rise due to inflation, companies might continue to invest, expecting to benefit from pricing power. However, if rates rise due to higher real interest rates, companies might reduce investment, which could positively impact short-term cash flows but negatively affect long-term growth.

Impact on Discount Rates:

• Risk-Free Rate: The discount rate for equities generally increases with higher interest rates due to a higher risk-free rate.
• Risk Premiums: There could also be an added effect on risk premiums, including default spreads for the cost of debt and equity risk premiums.

Failure Risk: Higher interest rates can also increase a company's failure risk, particularly for young, money-losing companies or those with significant debt.

Therefore, the effect of rising interest rates on aggregate equity value depends on: 1. Why rates changed: Was it due to higher real rates or inflation? 2. How cash flows are affected: This involves pricing power, cost of goods sold, and reinvestment decisions.

Companies with high pricing power, low cost of goods sold, and short-term reinvestment cycles might actually see an increase in equity value with rising inflation and interest rates. Conversely, companies with low pricing power, high input costs sensitive to inflation, and long-term reinvestment needs could see their value decrease. This explains why different companies and sectors will experience varying impacts.

US Equity Performance in 2026

Despite the rise in US Treasury rates in 2026, US equities have had a decent year so far (through August). The S&P 500 and NASDAQ have both risen by approximately 12% and 13% respectively, not including dividends.

Analyzing daily movements: - On days when the 10-year Treasury rate rose by more than three basis points (42 days), stocks generally had a bad day, with the S&P 500 down by about 0.5%. - On days when rates fell by more than three basis points (31 days), stocks were up by about 0.5%.

This daily correlation suggests that rates do matter. However, the overall positive performance of stocks in 2026 can be attributed to rising earnings expectations. From January 1st to September 1st, 2026, analysts' earnings expectations for the S&P 500 increased by about 11% for 2026 and 8-10% for 2027. This increase in expected earnings has buffered the market against higher interest rates.

Sectoral and Regional Equity Performance

• US Sectors:
  • Energy: The best-performing sector, with aggregate market cap up 40% due to rising oil prices. The median energy company was up 27%.
  • Technology: Aggregate market cap up 25.2%, but the median tech company was up less than 8%, indicating that returns are top-heavy, driven by larger market-cap companies.
  • Real Estate: Less top-heavy, with the sector up 9.17% and the median company up 8.55%.
  • Worst Performers: Communication services, consumer discretionary, and consumer staples saw more than 50-60% of companies decline, with negative median returns.
• Global Equities:
  • Globally, equities are up about $17 trillion (11.28% return) in 2026. The US accounts for about $8 trillion of this increase (13% return).
  • Best Performing: Eastern Europe and Russia, though a small slice of global equities.
  • Worst Performing: China and India, two large emerging markets. Indian equities were down 4.6% in dollar terms (median stock down 10%), and median Chinese stocks were down 9%. Currency movements against the US dollar explain part of this, but regional variations are clear, influenced by economic growth and oil prices.

Conclusion

As the next FOMC meeting approaches, there will be much discussion about the Fed's actions and the Treasury's influence on interest rates. However, the primary driver of Treasury rates remains inflation. Since 2022, Treasury rates and inflation have been anchored between 2.5% and 3%. Unless there is a significant shift in inflation—either sustained high oil prices pushing inflation higher, or a decline in oil prices bringing inflation below 2%—rates are unlikely to change dramatically, regardless of Fed intervention.

The period of 2022 was a shock for investors and businesses accustomed to low rates and low inflation. However, both have adapted remarkably well. Businesses have managed to deliver profits despite higher interest rates and inflation, and investors have pushed markets higher. This suggests that the period between 2008 and 2022, characterized by unusually low rates, might have been the outlier. Markets and companies appear to be reverting to a more conventional interest rate regime and business practices.

With four months remaining in 2026, much can still happen. It is crucial to monitor all underlying drivers of interest rates rather than solely focusing on the entities perceived to set them.