Why Are Yields Rising?
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Interest rates ended the month significantly higher. The primary driver is a repricing of Fed policy. Not long ago, the market was expecting two rate cuts for 2026; now it is expecting three hikes.
The Fed has clear reasons to hike: a solid economy risks overheating, while a tight labor market threatens to spark wage-price spirals. Therefore, the Fed is hiking to cool activity before this self-reinforcing cycle becomes entrenched.
The Fed is also scarred by 2022 when they reacted too late and allowed inflation to reach 9%. Policymakers are determined not to repeat the mistake (a.k.a. “fighting the last war”). This time, they are moving aggressively to stamp out inflation before it takes root.
Exacerbating the issue, global interest rates move in tandem as nations compete for capital (investors choosing higher-yielding US bonds over German bonds, for example). Unfortunately, an oil price shock is reverberating around the world at the moment. Unlike the US, most economies struggle to absorb higher energy prices, forcing foreign central banks to raise rates in a vicious loop:
Where do rates go from here? How will it affect stocks?
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