By Neland Nobel

Written by Neland Nobel

Estimated Reading Time: 6 minutes

Almost one year ago, on September 22, 2025, we wrote a piece noting, and then trying to explain, that interest rates in the marketplace were rising, in defiance of both the Fed and other central banks.

Looking back to 2024, we observed:

“Note that approximately one year ago, the yield on the 10-year was 3.7%, and on the 30-year, it was 4.03%.  Now we are one year later, and after four cuts, the yield on the 10-year is 4.06% and the 30-year is 4.66%.  In short, rates have not gone down; they have not even been flat; instead, they are rising against the commands of the central bank.”

As we write today in early October of 2026, it is two years later, and interest rates on the US 10-year are now 5.28%, and the interest rate on the longer-term 30-year bond is 5.60%.

Thus, from the vantage point of two years ago, the 10-year is 42.7% higher, and the 30-year yield is 39% higher.  Remarkably, the US central bank did not raise rates until just recently, and then by a paltry one quarter of one percent.  This is a “market tightening”, not a FED tightening.

The question we asked then, and the question worth asking now, is why rates are rising in the marketplace faster than central banks mandate.

The usual answers are: the economy is hot, and AI developers in particular are borrowing a lot of money.  Second, inflation has stayed stubbornly high, likely driven by the Iran War and oil prices.  The third cause typically offered is that Treasury supply is too large because we have to finance an enormous and rising Federal deficit.

Finally, many analysts correctly note that interest rates were being held deliberately low for many years, actually negative in real terms at times, and that this manipulation of ultra-cheap credit must end at some point, and the current rates should be interpreted as a return to normality.

However, the explanations above do not explain why foreign rates are rising as well.  For the most part, foreign economies are quite slow; AI activity is almost entirely in the US; and, as our lookback over the last few years shows, interest rates were rising before the conflict with Iran and the spike in oil prices.

So we are not saying the usual answers are wrong, but they clearly don’t seem to explain everything that is going on.

Thus, the cause of this global rise in rates is not altogether clear.

The more important question now becomes this:  regardless of the cause of this rise in rates, or whether we fully understand why the rise is occurring, at what level does the rise in rates start to slow down the economy, harm corporate earnings, stifle the consumer, and create both bear markets in stocks and a recession?

Unfortunately, that’s also very difficult to answer.  Debt can rise, but if earnings and GDP are also rising, we have more income to support the additional debt.  But unfortunately, debt appears to be rising much faster than growth, which is why the debt-to-GDP ratio keeps rising to levels we haven’t seen except during global wars, like World War II.

True, we have war today, but it is localized, thankfully for now, and in the US, consumers are not being drafted, rationed, or being killed off in huge numbers.  In fact, despite poor sentiment, consumers just keep spending. Our current difficulties are not on the scale of World War II, but yet we have debt-to-GDP ratios that rival that difficult period.

So, the cause is not war, although it contributes to the problem.  Rather, it is the ever-expanding welfare state built on Ponzi-like demographic assumptions.

History shows that rising rates hit the weakest sectors first, and that varies by business cycle.  Last time, rising rates hit the housing market and the mortgage-backed securities sold to investors worldwide. It gave us a tech bubble bursting in the first years of the new century, followed by an even bigger  Great Financial Crisis of 2007-2009.

Since then, we have had nothing but prosperity of varying degrees and have remarkably avoided large bear markets.  The worst was the COVID lockdown sell-off, but while it was difficult, both the economy and the market recovered well when governments took their boot off the windpipe of the world economy.

We don’t know better than the next guy how the next crisis will develop and when it will. But we would venture to guess that it probably won’t be where we saw trouble before, like the banking system.

More likely, it will be where there has been an explosion of borrowing, and the use of high leverage and financial engineering, such as in private credit, junk bonds, and foreign sovereign debt. But that is just an educated guess.

On paper, the corporate sector looks pretty good.  Analysts note that corporations have plenty of cash.  But that is not the whole story.  As Stephanie Pomboy and others have noted, the top 10 companies of the S&P have more than twice as much cash as the bottom 400 corporations within the S&P 500.  In short, cash is scarce for most smaller and mid-sized corporations.

Earnings are almost as concentrated in a handful of companies as cash. The Mag 7 produce about a quarter of S&P 500 earnings while representing about a third of the index’s value. The top 10 companies produce closer to one-third of earnings.

That is still historically tight. The average weight of the seven largest S&P names since 1957 is about 17% of earnings. At the 2000 tech peak, the top seven were more like 22–24% of earnings.  Today, we have the highest concentration of earnings in just 10 large tech companies, at about 33% of total earnings.

Many of these companies have invested heavily in AI, leaving both earnings and cash very vulnerable to calls for Federal Regulation, or worse, nationalization.  Throttling these companies over exaggerated fears could hurt the stock market because of this extreme concentration.

Here is the problem for the marginal borrower, whether private or governmental,  in a nutshell.  They floated a lot of bonds when rates were extremely low, held near zero by central banks.  That was smart to borrow when capital was artificially cheap.  But over the next few years, trillions of dollars in these bonds will come to term as the bonds mature.  Then borrowers must replace bonds that cost 3% and 4% with bonds that cost 7% to perhaps 8% or more.  How many, especially smaller companies financed with lower quality “junk” bonds, are so profitable they can do that?

The same is true of many governments.  Many of them have worse budget problems and demographics than we do.  Moreover, higher US rates typically mean a stronger dollar, and many foreign countries have borrowed in dollars.  That means they may be forced to repay debt in more expensive dollars than when they borrowed.  That, plus much higher interest rates, could put many in financial trouble.

General government gross debt, % of GDP

If you look at the 2026 projection, you will see that US excesses are matched very closely by the average of the G-7.  Given that many had their debt wiped out by World War II, they compete well with the US in debt excess.  Japan is the most excessive, while Germany is the lowest at about half of the US and G-7 level. What is deeply disturbing is that if we were to have a debt crisis, it would be a collective crisis.

So many factors are driving up interest rates, and as those rates rise, the risk increases that something in the system will break.

In the end, we think it largely is a supply problem.  In the US, Income tax and corporate tax collections fall $1.9 trillion short of covering government expenses.  That is a structural deficit that will not go away, and it worsens as the deficit widens and interest rates rise.

FY2026 through August
Total receipts	$4.85 trillion
Total outlays	$6.81 trillion
Deficit	$1.97 trillion

 It could get catastrophically worse if we have a recession, when government spending would rise even more, and revenue would fall accordingly.

Today’s MAGA Republican Party has many fine principles, but fiscal restraint does not seem to be among them.  On the other hand, if the other guys win, they want free universal health care, day care, college education, and complete support of unlimited illegal immigration.

We have a choice: watch the deficit keep growing, or suddenly expand completely out of control.  It is not really a good set of choices.

The bet MAGA is making is that we can “grow” our way out of the deficit.  Rising rates will, at some point, become a headwind for growth.  Moving to even more regulation or nationalization of the very sectors producing disproportionate earnings creates another threat.

The coming Congressional elections really do matter to the bond market, and likely ahead, it will matter to your 401K.

My fellow Americans:  you really want to vote for socialism?

-Neland Nobel

Neland ‘Neil’ Nobel was born in Uniontown, Pennsylvania, and moved to Arizona in 1961. He attended ASU and earned a B.A. and an M.A. in history, with a specialty in economic and military history.  He graduated Summa Cum Laude and received a Richard M. Weaver Fellowship from the Intercollegiate Studies Institute.  He spent the next 45 years in the financial services industry, ending his career with a 25-year run with UBS as a portfolio manager and Certified Financial Planner. In retirement, he remains active, having founded the Prickly Pear in 2020 and continuing to contribute content.  In his spare time, he is a certified firearms instructor and runs a hiking club and two shooting clubs.  He is married with three children and three grandchildren.

The author’s views are their own and do not constitute financial, investment, or legal advice. Investing involves risk; please consult with a qualified professional before making any financial decisions.

 

 

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