Interest Rates and Stock Prices: An Old Debate Flares up!
The war in Iran, oil prices and worries about a recession have all taken turns driving stock prices in 2026 but talk about interest rates and where they are going has been a constant concern all year. In the last few weeks, interest rate worries have come to the surface again, for three reasons, all related. The first is the rise in long-term US treasury rates to levels not seen in twenty years.…
Interest rates and stock prices have been a hot topic throughout 2026, with worries about potential recession and soaring oil prices adding fuel to the fire. For three reasons, the focus on interest rates has intensified in recent weeks. Firstly, long-term US treasury rates have surged to levels unseen in two decades. Secondly, the US debt has reached a staggering $40 trillion for the first time, raising concerns about whether this massive debt burden may reach a tipping point for bond buyers.
Finally, the appointment of Kevin Warsh as the new chair of the Federal Reserve has left many Fed Watchers uncertain about the Fed's future direction, leading to increased anticipation of the Federal Open Market Committee (FOMC) meeting in mid-September.
In this article, I aim to analyze the performance of interest rates in 2026, not just from a short-term perspective but also in the context of long-term trends in government bond yields across different currencies. Additionally, I will revisit a discussion initiated in 2022 about the relationship between interest rates and stock prices, and explore why higher rates don't always lead to lower stock prices, and how that effect varies across sectors and companies.
To understand government borrowing and the impact of interest rates on different asset classes, it's essential to recognize that when governments borrow money, they often issue bonds in financial markets. The interest rates on these bonds reflect the concerns of lenders about the purchasing power of the currencies they are issued in, and these rates become key indicators that drive market movements in various asset classes.
The article begins by examining US treasury rates, which had remained relatively stagnant for a few years before experiencing a steady rise throughout 2026. Long-term US treasuries, including the 20-year and 30-year bonds, saw significant increases, with the 10-year rate starting the year at 4.18% and reaching 4.75% by the end of August.
The graph provided illustrates the movement of US treasury rates across different maturities during the year, showing how the yield curve has become more upward sloping, with no significant impact from the Federal Reserve meetings or the change in chairmanship.
To put the recent increase in interest rates, particularly long-term rates, into perspective, I compared the movements of 3-month, 10-year, and 30-year rates between 1962 and the start of September 2026. The data shows the significant inflationary period during the 1970s, when rates rose to unprecedented levels, eventually settling in the 8-9% range in the 1980s and the 6-8% range in the 1990s.
However, the most striking trend is the prolonged period of low interest rates from 2009 to 2021, which ended abruptly in 2022 when the ten-year rate more than doubled from 1.52% to 3.88%, breaking the extended low-interest-rate stretch.
Written by urgent.news from Musings on Markets's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
