Q4 2026 CIO Letter – Rising Yields and Your Portfolio

For most of the past fifteen years, borrowing money was cheap, but in the last few years that paradigm has changed. This became even more acute in the third quarter of 2026 when the 10-year Treasury yield rose to 5.29%, a level we haven’t seen since the early 2000s. In September, the Federal Reserve raised rates for the first time since July 2023.¹ Not exactly the year of rate cuts the market expected back in January of this year.²

An interest rate is simply the cost of borrowing money. When that price goes up, it ripples through everything — the bonds in your portfolio, the value of companies, the cost of a mortgage. So let’s talk about why it’s happening and what it means for your portfolio.

Why are yields rising?

There isn’t one culprit. Several pressures arrived at the same time:

• Inflation worries came back as the war in Iran re-escalated, pushing oil above $100 a barrel and recent inflation numbers from September continue to show an uptick with CPI at 3.7%.³
• Governments around the world are borrowing more: the U.S. ran a nearly $2 trillion deficit in the fiscal year just ended, and interest on the debt now costs more than defense.⁴
• Companies are borrowing too to finance the AI boom, with hyperscaler spending on AI growing from under $100 billion in 2020 to nearly $700 billion this year.¹
• The two most reliable buyers of Treasuries are stepping back. Foreign investors’ share of ownership of US treasury bonds has fallen from a high of 47% in 2017 to roughly 30% this year, while the Federal Reserve’s ownership fell from a high of 26% in 2022 to 15%.⁵

Investors today are demanding more to hold bonds, but the good news is that buyers are still showing up. Last week’s 10-year treasury auction cleared at 5.30%, the highest in more than 20 years, with the strongest demand since 2014.⁴ A market that can’t find buyers has a real problem. A market where buyers return at a higher price is adjusting.

What this means for bonds

It has been a hard year to own bonds. The Bloomberg U.S. Aggregate Bond Index is down 2.9% for the year, while the Bloomberg Municipal Bond Index is down a little over 4%.¹

But the same math that caused the pain now works in your favor. Every bond bought from here pays more income; taxable bonds today are yielding 5.6% while municipal bonds are yielding 4.8%.⁶

An analysis from Vanguard looked at the five sharpest rises in bond yields since 1991. In each case the bond market posted a positive return the following year ranging from 4.3% to 18.5%.⁷ The higher income also acts as a cushion – you don’t need to know the peak in yields to benefit.

Image source: Vanguard

Why stocks can stay resilient

Higher yields raise the bar for stocks, because it changes the opportunity set available to investors. That being said the S&P 500 gained 2.3% in the third quarter even as yields jumped.¹

The reason is earnings. Analysts expect third-quarter S&P 500 earnings to grow 29.5% year over year, and because profits have grown faster than prices, the market’s P/E ratio has actually fallen from 23 to 19.³ There are no clear signs of recession, and AI investment is on track to add about 0.4% to GDP growth next year.⁸ History also favors quality. In periods of rising yields since 1963, more profitable, attractively priced U.S. companies returned 12.0% a year, versus 2.0% for less profitable, more expensive ones.¹

Which segments feel the greatest impact?

Not every part of the market feels higher rates equally. Businesses that run on borrowed money, or that compete with bonds for income-seeking investors, take the hardest hit. Of note, utility stocks fell more than 12% last quarter, REITs 6% and small cap growth stocks 9%.⁶

What this means for portfolios

Market disruption often creates opportunity, and this environment presents an opportunity to take some risk off the table in stocks and rebalance portfolios back to target in fixed income to take advantage of higher yields going forward.

For fifteen years, money was nearly free. Money has a price again. That has been painful for bond prices this year, but for patient investors a higher price of capital also means a higher expected return on capital — and that is worth being disciplined for.

As always, if you have questions about your portfolio, please reach out to your Perigon advisor.

1. Avantis Investors, Monthly ETF Field Guide, September 2026 (FactSet and Bloomberg data as of 9/30/26) ↩︎
2. J.P. Morgan Asset Management, Global Fixed Income Views 4Q 2026 ↩︎
3. U.S. Bureau of Labor Statistics ↩︎
4. Sandy Leeds, Market Update – October 12, 2026, citing MarketWatch, Barron’s, WSJ, FactSet and the Congressional Budget Office ↩︎
5. FRED and U.S. Treasury Fiscal Service, Federal Debt Held by the Public by holder ↩︎
6. J.P. Morgan Guide to the Market 4Q 2026 ↩︎
7. Vanguard, “How 2026 may set the table for stronger bond returns” (9/28/26)” ↩︎
8. Oxford Economics, “US: AI tracker – Full steam ahead,” 2026 ↩︎