It’s Late September and I Really Should Be Back at School

Our central message to readers remains that despite all of the focus on artificial intelligence, tariffs, oil market flare-ups and the myriad other issues enveloping capital markets, over time the bond market ultimately drives asset prices. Prior to a few weeks ago, for 19 calendar years, the U.S. 10-year Treasury yield, which moves in the opposite direction of price, had not closed above 5%.¹

For this week, growth and inflation impulses remain strong. This past week, Standard & Poor’s released its U.S. Purchasing Managers’ Index (PMI) report, which showed domestic business activity rose at its fastest rate in five years despite higher input costs.² The report also indicated that job growth increased at a pace not seen in four years, and backlogs of uncompleted orders rose to their highest levels since March 2022.³ While U.K. PMIs fell and Japanese PMIs ticked modestly higher, eurozone output expanded at its highest rate since April 2023.⁴ Durable goods orders, released Friday, also demonstrated better output than expectations, with new orders for manufactured durable goods virtually unchanged for August versus expectations for a three-tenths-of-a-percent decline.⁵

Perhaps most importantly, the U.S. Treasury had a relatively weak auction for notes maturing in five years. What is called the bid-to-cover ratio, which looks at the total investor dollars participating in an auction relative to the auction’s issuance size, came in at the lowest level in several years, based on U.S. Treasury data.⁶ Treasury auction activity is a key variable that we will continue to gauge, along with foreign ownership trends, as we continue to assess marginal buyer activity given recent yield stresses.

While narratives abound as to why, and while no questionnaires exist on order-entry systems prompting investors to explain why they are selling, we would cite three primary reasons.

First, inflation and growth impulses remain strong relative to expectations. In addition to the data cited above in the past week, U.S. consumer activity remains strong, with the Federal Reserve Bank of Richmond noting summer trends have been “assuaging concerns of a near-term consumer pullback.”⁷ The European consumer has performed au contraire to skeptics, with the European Central Bank noting improvements in real (inflation-adjusted) income as well as expectations that unemployment will reach historically low levels in coming quarters.⁸ Other regions, including India and Japan, have also contributed to stronger growth impulses.

Second, central bank uncertainty continues to draw investor attention. Since late August and more acutely in recent weeks, we have heard from over 10 major central banks, ranging from the People's Bank of China to the European Central Bank to the Bank of Japan, and stark variance across policy decisions and communications has rippled through the bond market. The U.S. Federal Reserve remains the bellwether policymaker, and with Chair Warsh noting that last week’s rate increase “removed a dose of accommodation,” investors have reflected concerns that future dose removals may follow.⁹

Third, indebtedness and the lack of near-term improvement prospects loom large on investor psyche. It has been a mere month since the U.S. Treasury noted federal debt surpassed $40 trillion, an inauspicious milestone with varied implications. The nonpartisan Congressional Budget Office (CBO) released a report on Thursday evaluating scenarios including the potential for even higher interest rates, and its models suggested that should rates increase by 1% over current projections, debt levels would reach 222% of GDP by 2056, markedly higher than current estimates.¹⁰ These levels spark concerns for investors, and combined with the earlier two points, the current bond market zeitgeist remains shaken, not stirred. 

One of my favorite phrases in our industry is that we want to avoid fighting yesterday’s battles. Interest rates have already had a sharp move higher, and if we trace back to the low point in 10-year interest rates during COVID’s throes (March 9, 2020) through today, broad bond proxies are only down about 3% for taxable and actually up 2% for tax-exempt indices through September 24.¹⁴ High-yield and investment-grade corporate bonds, along with inflation-protected bonds, have also produced positive total returns.

Bond math can be infinitely complex, but a simplified analysis suggests that total returns are a function of income (for bonds that pay a coupon) and price (how the underlying bond moves over a measurement period). When the U.S. 10-year Treasury note yielded a paltry 0.39% on March 9, 2020, investors were not collecting significant compensation in coupon form, leaving them susceptible to adverse price movement as interest rates ascended higher. With today’s yield topping 5.2%, investors simply have more cushion to offset prices working against them should rates continue to climb. The speed of that upward move, should it occur, is the key for investors.

The forward curve represents the capital markets’ estimation of where interest rates of varied maturities or tenors may settle. As of now, markets expect the 10-year Treasury yield to be very modestly higher than where it stands now in both a year and three years from now. Most of the “action” in the forward curve rests in the front end of the curve (shorter maturities), where markets expect the Fed to raise rates a few more times over the course of the next 18 months. Interestingly, the forward curve expects 30-year Treasury yields to be lower in three years than where they stand now.¹⁵ While we do not offer categorical advice to readers on these pages, simple bond math suggests that additional cushion relative to more recent experience benefits investors as long as the rate of change of adverse price moves doesn’t happen too quickly. Further, for taxable investors, added compensation in the form of historically wide taxable-equivalent yields (adjusted for federal, state, local and other tax incentives accruing to bondholders as applicable) provides additional insulation. Again, opportunity cost relative to other investment options is not included in that concept, but we are clearly in a very different bond market regime than we have been in recent years. 

Three major developments to note this week, and they all have bond market implications.

First, the United Nations meeting in New York offered a lens into U.S.-Iran tensions as well as potential AI regulation. President Trump underscored the U.S. commitment to restraining Iran’s nuclear ambitions and outlined potential strategic choices the U.S. may make from here. Iranian President Masoud Pezeshkian offered counterpoints to Trump’s claims, seemingly reflecting the significant gaps between the countries. Various global leaders cited energy price escalations as major economic obstacles, impacting inflation and by extension their own borrowing costs.¹⁶ Further, President Trump emphasized concerns on AI regulations, noting that the U.S. “totally rejects any attempt to construct a globalist scheme to control artificial intelligence.”¹⁷

Second, President Trump and Chinese President Xi Jinping’s Washington summit unfolded this week. As of publication time, official statements and readouts have not occurred, but markets are most interested in trade implications, hints about Taiwan, and any discussions around Middle East tensions. Markets assign a fragile diplomatic tone to current relations, and inflationary concerns around Chinese rare earth exports and complications to any Iranian peace accord due to China’s extensive energy purchases have the market’s attention.

Third, we note that at publication time, the New York Times reports that Iranian foreign minister Abbas Araghchi proposed a seven-day plan to Washington to end the war, reopen the Strait of Hormuz and revive nuclear talks.¹⁸ Stocks bounced, bonds stabilized and hydrocarbon prices dropped, but investors have seen this movie before; tentative peace deals may open pathways for conversations, but nuclear negotiations are complex and high-stakes. While we retain a glass-half-full, optimistic forward perspective, stabilizing bond yields and contained energy prices are prerequisites for that upbeat viewpoint.

 

 

 

¹ Northern Trust Wealth Management Research. While some pricing services suggest that the 10 Year Yield exceeded 5% in October 2023, on a closing basis, we use July 2007 as our reference point using the TNX index as a proxy.

² Standard and Poor’s. “S&P Global US Flash PMI.” S&P Press Releases. September 23, 2026. https://www.pmi.spglobal.com/Public/Home/PressRelease/ed177f50167b4203ac490a961ea706be. Accessed 25 September 2026.

³ Ibid.

⁴ Williamson, Chris. “Advanced economies report further growth in September, but US outperformance widens.” S&P Global Research. September 24, 2026. https://www.spglobal.com/market-intelligence/en/news-insights/research/2026/09/advanced-economies-report-further-growth-in-september-but-us-outperformance-widens. Accessed 25 September 2026.

⁵ United States Census. “Monthly Advance Report on Durable Goods Manufacturers' Shipments Inventories and Orders.” United States Census Press Release. September 25, 2026. https://www.census.gov/manufacturing/m3/adv/current/index.html. Accessed 25 September 2026.

⁶ The United States Treasury. “Treasury Securities Auctions Data.” FiscalData. https://fiscaldata.treasury.gov/datasets/treasury-securities-auctions-data/treasury-securities-auctions-data. Accessed 25 September 2026.

⁷ O’Trakoun, John. “Retail Resilience Defies Doomsayers.” Richmond Fed Macro Minute. July 14, 2026. https://www.richmondfed.org/research/national_economy/macro_minute/2026/retail_resilience_defies_doomsayers. Accessed 25 September 2026.

⁸ European Central Bank. “ECB staff macroeconomic projections for the euro area, September 2026.” ECB Macroeconomic Projections. September 2026 release. https://www.ecb.europa.eu/press/projections/html/ecb.projections202609_ecbstaff~8e340fc69d.en.html. Accessed 25 September 2026.

⁹ The United States Federal Reserve. “Transcript of Chairman Warsh’s Press Conference.” Federal Reserve Media Center. September 16, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260916.pdf. Accessed 25 September 2026.

¹⁰ Congressional Budget Office. “Projections of Deficits and Debt Under Alternative Scenarios for Interest Rates and the Budget.” September 24, 2026. https://www.cbo.gov/publication/62758. Accessed 25 September 2026.

¹¹ Northern Trust Wealth Management Research. Pairwise correlations measured using daily data in local currency terms.

¹² Ibid

¹³ Northern Trust Wealth Management Research. Analysis using SPY and TLT exchange traded funds as proxies for the S&P 500 and long duration U.S. Government bonds, respectively. 120 day pairwise correlation using daily returns, September 28, 2020 – September 25, 2026.

¹⁴Northern Trust Wealth Management Research, Bloomberg. Data accessed on terminal, September 25, 2026.

¹⁵ Ibid

¹⁶ The United Nations. “The world comes to New York: What's at stake at UN General Assembly high-level week.” UN Department of Economic and Social Affairs. September 16, 2026. https://www.un.org/en/desa/the-world-comes-to-new-york-whats-at-stake-at-un-general-assembly-high-level-week. Accessed 25 September 2026.

¹⁷ United Nations. “Statement by the United States of America.” United Nations General Debate, 81st Session. September 2026. https://gadebate.un.org/en/81/united-states-america. Accessed 25 September 2026.

¹⁸ Fassihi, Faraz and Baskar, Pranav. ”Iran Proposes 7-Day Plan to End War.” September 24, 2026. https://www.nytimes.com/2026/09/24/world/middleeast/iran-proposal.html. Accessed 25 September 2026.