By Thierry Hasse, Chief Investment Officer
Elevage Partners | October 7, 2026
Anyone who refinanced a home, renewed a business credit line, or priced a new bond this fall has already met the quarter’s main story. Lending money for 10 years now pays more than at any time since May 2002: the 10-year Treasury yield closed at 5.31% on Oct. 5 (Source: U.S. Treasury; Elevage Partners Research). Mortgage rates tend to move with that yield (Source: Freddie Mac).
What sets that rate is who is borrowing and what lenders want in return. This quarter answered both more plainly than any before it this year.
What the Quarter Revealed
Chief Investment Officer Thierry HasseOn Sept. 16, the Federal Reserve raised its target range by a quarter percentage point, from 3.5%-3.75% to 3.75%-4%, its first increase since July 2023 (Source: Federal Reserve). The change in the Fed’s own expectations was larger than the move itself.
Last December, when the Fed set its target range at 3.5%–3.75%, the typical Fed official expected rates to move lower during 2026. In September, the same officials’ median projection showed no cut this year or next (Source: Federal Reserve, Dec. 10, 2025, and Sept. 16, 2026). A year expected to bring cuts brought an increase instead.
Long-term rates kept climbing after the vote, to that 24-year high on Oct. 5. In our assessment, when long-term rates keep rising while the Fed is already raising short-term ones, lenders are charging for something the Fed does not control: how much Washington and other large borrowers will need, and for how long.
The largest of those borrowers is Washington. The federal deficit came to $2 trillion in the first 11 months of the fiscal year, roughly the same as a year earlier (Source: Congressional Budget Office). Interest on the debt rose 12% over the same months, faster than Social Security, Medicare, or Medicaid. Higher rates make the deficit more expensive to carry, and a costlier deficit requires more borrowing. We believe that loop, with no sign yet of the deficit shrinking, is a large part of what lenders are now charging for.
The pressure is not only American. On Sept. 18, the Bank of Japan raised its policy rate to 1.25%, its highest since 1995 (Source: Bank of Japan; The Nation). Japan is the largest foreign holder of U.S. Treasury debt (Source: U.S. Treasury, Treasury International Capital data, July 2026). As Japanese savers are paid more at home, we would expect less of their money to flow into U.S. Treasuries.
Governments are no longer alone at the window. The largest cloud and AI companies have turned to the bond market to pay for their data centers. Across the five biggest spenders, borrowing paid for about a third of capital spending over the past year, up from under a tenth in 2024 (Source: FactSet, July 23, 2026). In our assessment, this is the second force behind higher long-term rates. A dollar borrowed for a data center and a dollar borrowed to cover a deficit compete for the same pool of long-term savings, and both borrowers want it at the same time.
Inflation, meanwhile, is arriving through a door that rate increases do not guard. Consumer prices rose 3.4% in the 12 months to August, but only 2.4% excluding food and energy (Source: Bureau of Labor Statistics). Nearly all of that difference is energy (Source: Bureau of Labor Statistics; Elevage Partners research).
Energy prices rose 16.3% over the same 12 months (Source: Bureau of Labor Statistics). The war with Iran has cut ship crossings through the Strait of Hormuz to a small fraction of the roughly 130 to 140 a day that passed before it (Source: Reuters, Aug. 5 and Sept. 16, 2026).
Diesel is the sharper problem, and its cause is less obvious. Ukrainian drone strikes have taken Russian refineries offline, and Russia, normally one of the world’s largest diesel exporters, banned diesel exports in July and kept the ban through September (Source: Hydrocarbon Processing, Aug. 31, 2026).
The U.S. average diesel price set a record of $6.53 a gallon in the week of Sept. 21 and remains about two-thirds above a year ago (Source: U.S. Energy Information Administration, Oct. 6, 2026). Diesel moves the trucks, trains, and barges that carry nearly everything people buy (Source: U.S. Energy Information Administration), which in our view is how the impact of drone strike on a Russian refinery reaches an American store shelf within months.
Trade adds a slower pressure. On July 24, new tariffs of 10% or 12.5% took effect on imports from 60 trading partners (Source: Morgan Lewis, July 2026). We believe costs like these reach prices over many months, and a higher interest rate does little to stop them.
Where This Sits in Our View
None of this is a new view for us. Since January we have expected interest rates to stay higher and for longer than markets expected: closer to the decade before the 2008 financial crisis, when the 10-year Treasury yield averaged roughly 4% to 6% a year, than to the decade after it, when it averaged about 2.5% (Source: Federal Reserve Board). We see government borrowing as the main reason, with energy and trade stacking on top. This quarter added the evidence.
In September we wrote that locking in long-term bond yields could prove a generational chance to secure income, or a bet against a fiscal path that could push long rates higher still. Our response was to “favor shorter duration” and to let our Investment Committee’s review, “not a guess about the deficit,” decide when to extend (Source: Elevage Partners, “Fixed income opportunities,” Sept. 9, 2026). Since then the 10-year yield has risen from 4.83% to 5.31% (Source: U.S. Treasury, Sept. 9 and Oct. 5, 2026). Bonds that mature sooner lose far less value when long-term rates climb, and they come due sooner to be reinvested at the higher rates.
The view has not changed; what it means depends on where rates start. In January, when markets were counting on rate cuts, it meant rates would end the year higher than those cuts implied. With rates already higher and the Fed leaning toward more increases rather than cuts, it now means rates about where they are, perhaps somewhat higher, and not falling this year.
Our Outlook, and What We Are Watching
What follows is our opinion. The pressure on long-term rates is likely to persist into 2027, because neither Washington nor the AI builders have a reason to borrow less. The risk we would put first in the coming months is in stock prices, which now lean heavily on earnings expectations.
Analysts now expect S&P 500 earnings to grow 32% this year, more than double the 15% they expected in January (Source: FactSet, Oct. 2, 2026, and Jan. 9, 2026). They expect another 16% in 2027 (Source: FactSet, October 2, 2026).
Those expectations are carrying the market. The S&P 500 finished the quarter about 2% higher even as long-term yields climbed (Source: S&P Dow Jones Indices; Elevage Partners research), and its price relative to expected earnings sits close to its 10-year average (Source: FactSet, October 2, 2026).
In our assessment, stocks look reasonably priced only if those earnings arrive. If they disappoint, we do not expect the Fed to soften the landing: a central bank raising rates to bring inflation down has little room to cut them to support stock prices.
The calendar over the next 10 weeks will test each piece. On Oct. 14, the Bureau of Labor Statistics reports September consumer prices, and we will be looking at whether energy keeps pulling headline inflation away from the underlying rate. Third-quarter earnings arrive through late October and November, and the figure we will watch most closely is next year’s estimate, particularly whether it holds. The Fed meets on Oct. 27 and 28, and again on Dec. 8 and 9, when officials will publish new projections for where they expect rates to go (Source: Federal Reserve).
The Work Behind the View
When earnings expectations carry this much of the market, one part of how we work matters more than usual. Each company we own carries a valuation level set by the quality of its business, and for most of them that level is measured against analysts’ forward earnings expectations. Lower expected earnings make the same share price more expensive, so a cut to estimates can push a company past that level even if its price never moves.
When that happens, our Investment Committee weighs the valuation alongside the long-term trend the company was bought for, what the business is actually doing, and its outlook. The level opens that conversation; it does not settle it. The work starts earlier, in research, where each earnings report and estimate change is read against the reason we own the company in the first place.
What Stays Steady
Watching borrowing costs, fuel prices, and the market’s expectations all rise in the same few weeks can make a long-range plan feel as if it were written for a different year. The goals a plan is built around have not moved with those readings, and neither has the way we decide what to own: bonds chosen for the job each one does, whether that is defending against rising rates, producing income, or providing stability, and stocks chosen company by company around a small number of long-term trends.
What the quarter changed is the opportunity in front of a plan, and where the risk sits. For a plan that draws income, bonds coming due in the next few years can be reinvested at rates well above anything available in the decade after the 2008 crisis (Source: U.S. Treasury). For a retiree, locking in today’s higher yields on high-quality bonds for 10 years or longer is a conversation worth having, weighed against the risk we named in September: that long-term rates go higher still. For the part of a plan meant for the long run, the risk this quarter points to is in earnings, and that is where our review of each company is already looking.
Important Disclosure(s)
Holdings Disclosure: Elevage Partners and/or its clients may hold positions in securities referenced in this commentary. The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.
Quarterly market update: The bill is due
Home / Quarterly market update: The bill is due
By Thierry Hasse, Chief Investment Officer
Elevage Partners | October 7, 2026
Anyone who refinanced a home, renewed a business credit line, or priced a new bond this fall has already met the quarter’s main story. Lending money for 10 years now pays more than at any time since May 2002: the 10-year Treasury yield closed at 5.31% on Oct. 5 (Source: U.S. Treasury; Elevage Partners Research). Mortgage rates tend to move with that yield (Source: Freddie Mac).
What sets that rate is who is borrowing and what lenders want in return. This quarter answered both more plainly than any before it this year.
What the Quarter Revealed
Last December, when the Fed set its target range at 3.5%–3.75%, the typical Fed official expected rates to move lower during 2026. In September, the same officials’ median projection showed no cut this year or next (Source: Federal Reserve, Dec. 10, 2025, and Sept. 16, 2026). A year expected to bring cuts brought an increase instead.
Long-term rates kept climbing after the vote, to that 24-year high on Oct. 5. In our assessment, when long-term rates keep rising while the Fed is already raising short-term ones, lenders are charging for something the Fed does not control: how much Washington and other large borrowers will need, and for how long.
The largest of those borrowers is Washington. The federal deficit came to $2 trillion in the first 11 months of the fiscal year, roughly the same as a year earlier (Source: Congressional Budget Office). Interest on the debt rose 12% over the same months, faster than Social Security, Medicare, or Medicaid. Higher rates make the deficit more expensive to carry, and a costlier deficit requires more borrowing. We believe that loop, with no sign yet of the deficit shrinking, is a large part of what lenders are now charging for.
The pressure is not only American. On Sept. 18, the Bank of Japan raised its policy rate to 1.25%, its highest since 1995 (Source: Bank of Japan; The Nation). Japan is the largest foreign holder of U.S. Treasury debt (Source: U.S. Treasury, Treasury International Capital data, July 2026). As Japanese savers are paid more at home, we would expect less of their money to flow into U.S. Treasuries.
Governments are no longer alone at the window. The largest cloud and AI companies have turned to the bond market to pay for their data centers. Across the five biggest spenders, borrowing paid for about a third of capital spending over the past year, up from under a tenth in 2024 (Source: FactSet, July 23, 2026). In our assessment, this is the second force behind higher long-term rates. A dollar borrowed for a data center and a dollar borrowed to cover a deficit compete for the same pool of long-term savings, and both borrowers want it at the same time.
Inflation, meanwhile, is arriving through a door that rate increases do not guard. Consumer prices rose 3.4% in the 12 months to August, but only 2.4% excluding food and energy (Source: Bureau of Labor Statistics). Nearly all of that difference is energy (Source: Bureau of Labor Statistics; Elevage Partners research).
Energy prices rose 16.3% over the same 12 months (Source: Bureau of Labor Statistics). The war with Iran has cut ship crossings through the Strait of Hormuz to a small fraction of the roughly 130 to 140 a day that passed before it (Source: Reuters, Aug. 5 and Sept. 16, 2026).
Diesel is the sharper problem, and its cause is less obvious. Ukrainian drone strikes have taken Russian refineries offline, and Russia, normally one of the world’s largest diesel exporters, banned diesel exports in July and kept the ban through September (Source: Hydrocarbon Processing, Aug. 31, 2026).
The U.S. average diesel price set a record of $6.53 a gallon in the week of Sept. 21 and remains about two-thirds above a year ago (Source: U.S. Energy Information Administration, Oct. 6, 2026). Diesel moves the trucks, trains, and barges that carry nearly everything people buy (Source: U.S. Energy Information Administration), which in our view is how the impact of drone strike on a Russian refinery reaches an American store shelf within months.
Trade adds a slower pressure. On July 24, new tariffs of 10% or 12.5% took effect on imports from 60 trading partners (Source: Morgan Lewis, July 2026). We believe costs like these reach prices over many months, and a higher interest rate does little to stop them.
Where This Sits in Our View
None of this is a new view for us. Since January we have expected interest rates to stay higher and for longer than markets expected: closer to the decade before the 2008 financial crisis, when the 10-year Treasury yield averaged roughly 4% to 6% a year, than to the decade after it, when it averaged about 2.5% (Source: Federal Reserve Board). We see government borrowing as the main reason, with energy and trade stacking on top. This quarter added the evidence.
In September we wrote that locking in long-term bond yields could prove a generational chance to secure income, or a bet against a fiscal path that could push long rates higher still. Our response was to “favor shorter duration” and to let our Investment Committee’s review, “not a guess about the deficit,” decide when to extend (Source: Elevage Partners, “Fixed income opportunities,” Sept. 9, 2026). Since then the 10-year yield has risen from 4.83% to 5.31% (Source: U.S. Treasury, Sept. 9 and Oct. 5, 2026). Bonds that mature sooner lose far less value when long-term rates climb, and they come due sooner to be reinvested at the higher rates.
The view has not changed; what it means depends on where rates start. In January, when markets were counting on rate cuts, it meant rates would end the year higher than those cuts implied. With rates already higher and the Fed leaning toward more increases rather than cuts, it now means rates about where they are, perhaps somewhat higher, and not falling this year.
Our Outlook, and What We Are Watching
What follows is our opinion. The pressure on long-term rates is likely to persist into 2027, because neither Washington nor the AI builders have a reason to borrow less. The risk we would put first in the coming months is in stock prices, which now lean heavily on earnings expectations.
Analysts now expect S&P 500 earnings to grow 32% this year, more than double the 15% they expected in January (Source: FactSet, Oct. 2, 2026, and Jan. 9, 2026). They expect another 16% in 2027 (Source: FactSet, October 2, 2026).
Those expectations are carrying the market. The S&P 500 finished the quarter about 2% higher even as long-term yields climbed (Source: S&P Dow Jones Indices; Elevage Partners research), and its price relative to expected earnings sits close to its 10-year average (Source: FactSet, October 2, 2026).
In our assessment, stocks look reasonably priced only if those earnings arrive. If they disappoint, we do not expect the Fed to soften the landing: a central bank raising rates to bring inflation down has little room to cut them to support stock prices.
The calendar over the next 10 weeks will test each piece. On Oct. 14, the Bureau of Labor Statistics reports September consumer prices, and we will be looking at whether energy keeps pulling headline inflation away from the underlying rate. Third-quarter earnings arrive through late October and November, and the figure we will watch most closely is next year’s estimate, particularly whether it holds. The Fed meets on Oct. 27 and 28, and again on Dec. 8 and 9, when officials will publish new projections for where they expect rates to go (Source: Federal Reserve).
The Work Behind the View
When earnings expectations carry this much of the market, one part of how we work matters more than usual. Each company we own carries a valuation level set by the quality of its business, and for most of them that level is measured against analysts’ forward earnings expectations. Lower expected earnings make the same share price more expensive, so a cut to estimates can push a company past that level even if its price never moves.
When that happens, our Investment Committee weighs the valuation alongside the long-term trend the company was bought for, what the business is actually doing, and its outlook. The level opens that conversation; it does not settle it. The work starts earlier, in research, where each earnings report and estimate change is read against the reason we own the company in the first place.
What Stays Steady
Watching borrowing costs, fuel prices, and the market’s expectations all rise in the same few weeks can make a long-range plan feel as if it were written for a different year. The goals a plan is built around have not moved with those readings, and neither has the way we decide what to own: bonds chosen for the job each one does, whether that is defending against rising rates, producing income, or providing stability, and stocks chosen company by company around a small number of long-term trends.
What the quarter changed is the opportunity in front of a plan, and where the risk sits. For a plan that draws income, bonds coming due in the next few years can be reinvested at rates well above anything available in the decade after the 2008 crisis (Source: U.S. Treasury). For a retiree, locking in today’s higher yields on high-quality bonds for 10 years or longer is a conversation worth having, weighed against the risk we named in September: that long-term rates go higher still. For the part of a plan meant for the long run, the risk this quarter points to is in earnings, and that is where our review of each company is already looking.