Bond Yield Surged Before Soft Data Interrupted Selloff

Bond yields surged before soft data interrupted the selloff

U.S. stocks were mixed last week while bonds retreated. The Dow Jones Industrial Average fell 1.3 percent and the S&P 500 slipped 0.2 percent, while the Nasdaq gained 0.5 percent. The bond market was the story underneath: the 10-year Treasury yield finished at 5.28 percent, 11 basis points higher for the week, after climbing above 5.3 percent on Thursday, its highest level since 2002, before a soft September employment report and cooler core inflation helped prompt a partial reversal. Oil declined 1.4 percent and gold fell 3.6 percent.

Also last week: Russell 2000 −0.1%, MSCI EAFE −1.5%, MSCI Emerging Markets −1.2%, Bloomberg U.S. Aggregate −0.6%.

The bond market seemed to spend most of the week repricing the same concerns from several directions: the Federal Reserve’s September rate increase, federal borrowing and debt issuance, financing tied to artificial intelligence infrastructure, and the risk that the conflict with Iran keeps inflation pressure alive. The 10-year Treasury yield reached 5.34 percent and the 30-year yield 5.69 percent during Thursday’s session, levels last seen in 2002, before giving back part of the move. Even after that reversal, the Bloomberg U.S. Aggregate Bond Index declined 0.6 percent for the week.

Soft employment and inflation data gave bond investors reason to reconsider their outlooks. September payrolls increased by 29,000, prior months were revised lower by a combined 60,000 jobs, and the unemployment rate rose to 4.2 percent. Labor force participation increased to 61.8 percent from 61.6 percent, so part of the rise in unemployment reflected more people looking for work. Core PCE inflation for August came in at 3.0 percent year over year, below the 3.3 percent consensus estimate. Along with comments from New York Fed President John Williams on September 29 that there was “no need for urgency” after the last increase, the reports reduced expectations for an October move: by Friday’s close, fed funds futures as tracked by the CME FedWatch tool priced roughly a 22 percent probability of an October increase, down from about 64 percent a week earlier, as reported by Yahoo Finance on October 2. The unresolved question is whether the bond market has moved too far in pricing persistent inflation risk, particularly if the conflict with Iran de-escalates and energy pressure eases.

Oil and Iran. West Texas Intermediate crude ended at $91.11, down 1.4 percent for the week. Middle East energy shipments continued to recover and European governments agreed to release diesel reserves, adding near-term supply, but diplomatic efforts made little progress. Oil remains caught between military headlines and evidence that physical supply routes are functioning.

Small companies and financing costs. The Russell 2000 declined 0.1 percent for the week and fell about 7 percent during the third quarter. Smaller companies tend to rely more heavily on floating-rate borrowing, so sustained increases in market rates could pressure their margins more quickly than at larger companies with longer-dated financing at fixed rates.

Midterm elections. As the fourth quarter begins, the approaching midterm elections add another layer of policy uncertainty. The useful point for investors is not to predict the result or the market’s response, but to recognize that rates, fiscal policy, geopolitics, and elections can all compete for attention at the same time. Investors focused on long-term strategy avoid letting short-term gyrations shake their stance.

The adjustment in bonds has been sharp, but it also changes the opportunity set. A 10-year Treasury yield above 5 percent gives conservative investors an income alternative that was largely absent for much of the past 15 years. If inflation continues to ease and the labor market cools gradually, some of the recent increase in longer-term yields could reverse. If energy prices rise again or fiscal concerns stay prominent, yields could remain elevated even without another immediate increase in the federal funds rate.

None of this is new. Short-term uncertainty is always present and on stage; it just changes its costume. Asset allocation, diversification, discipline, and patience are core ingredients of a good long-term investor’s plan. We continue to advise investors to be disciplined in adhering to their investment policy and remain patient.

This week brings September services activity data, the August trade balance and consumer credit, minutes from the Federal Open Market Committee meeting, weekly jobless claims, and the preliminary October University of Michigan consumer survey.

The services and labor market readings will show whether the cooling evident in September payrolls is broadening. The FOMC minutes and scheduled remarks from several Federal Reserve officials may also provide more detail on how policymakers are weighing inflation risk after the September increase.

“The important thing is not to stop questioning. Curiosity has its own reason for existence.”

Capital at Work is our weekly letter on what the markets did and what it means, written so you can repeat it at your own table. It arrives by email every Monday morning.

Sources  Market performance and asset returns: YCharts market data table, week ended October 2, 2026. Index closing levels: Yahoo Finance and STL.News market reports for October 2, 2026. Oil and gold: Wall Street Journal Markets Digest, week ended October 2, 2026; Kitco, October 2, 2026 (spot gold). Treasury yields: YCharts U.S. Treasury chart, week ended October 2, 2026; Reuters, October 1, 2026 (10-year yield highest since 2002); Yahoo Finance, September 29, 2026 (30-year yield highest since 2002). Employment: U.S. Bureau of Labor Statistics, Employment Situation, September 2026, released October 2, 2026; Federal Reserve Bank of St. Louis flash report, October 2026. Inflation: U.S. Bureau of Economic Analysis, Personal Income and Outlays, August 2026, released September 30, 2026; consensus estimate as reported by Benzinga, September 30, 2026. Federal Reserve: New York Fed President John Williams, remarks of September 29, 2026, as reported by Forbes Advisor, October 2, 2026. Rate probabilities: CME FedWatch tool, as reported by Stocktwits and carried by Yahoo Finance, October 2, 2026. Oil supply: EnergyNow weekly oil market summary, week ended October 2, 2026. Small companies: Royce Investment Partners, third quarter 2026 small-cap recap. Economic calendar: MarketWatch. Quote: Albert Einstein, as quoted by William Miller in LIFE magazine, May 2, 1955. NDS Wealth Advisors believes these sources are reliable but cannot guarantee the accuracy or completeness of third-party data and assumes no liability for errors or omissions.

Disclosures  This material is for informational and educational purposes only and should not be relied upon as investment, legal, or tax advice, or a recommendation of any particular security, strategy, or investment product. Any economic forecasts or market outlooks expressed herein are forward-looking statements, subject to change without notice, and may not materialize. Investors cannot invest directly in an index. Index returns do not reflect the deduction of fees, commissions, or expenses, which would reduce overall performance. Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. This material does not consider the investment objectives, financial situation, or unique needs of any individual investor. Consult your financial advisor before making any investment decisions.