What could possibly go wrong next?

Somehow, after a quarter in which oil rebounded 40 percent, US diesel prices hit records, the Federal Reserve raised interest rates, government borrowing costs climbed to levels unseen in decades and corporate bonds suffered their worst quarterly slump since 2022, American stocks still managed to reach record highs. If financial markets really are a crystal ball, one wonders whether somebody remembered to clean it.

The third quarter closes with the bond market offering the clearest picture of the strain underneath. The yield on the benchmark 10-year US Treasury has risen 81 basis points since July, its steepest three-month increase since 2022, while the 30-year Treasury yield touched 5.621 percent this week, its highest since 2002. Nor is the selloff confined to America. German and French 10-year yields have climbed to 17- and 18-year highs, respectively, while Japan’s benchmark yield is near multi-decade highs after its sharpest quarterly rise in more than two decades.

So, what exactly are bond markets trying to tell us?

Part of the answer still runs through the Middle East. Seven months after Donald Trump made the ill-advised decision to attack Iran alongside Israel, the resulting energy shock has worked its way far beyond the oil market. Brent remains above $100 even after Middle Eastern crude exports recovered to their highest level since the conflict began. Inflation concerns have returned, central banks have turned more hawkish and investors increasingly expect interest rates to remain higher for longer.

The connection has become remarkably tight. The correlation between US benchmark oil prices and the 10-year Treasury yield recently jumped to its highest in 35 years, just short of the record reached around the first Gulf War. That makes every hopeful headline about Hormuz potentially relevant to the bond market and every fresh escalation potentially relevant to the Fed. How comfortable should investors be when one of the world’s most important borrowing costs has become so sensitive to developments in one of its most dangerous waterways?

Yet oil cannot explain everything. The 30-year Treasury yield climbed to a 24-year high this week even as crude prices fell and New York Fed President John Williams said there was “no need for urgency” about another rate increase. Government finances remain uncomfortable, debt issuance is heavy, economic growth has proved surprisingly resilient and the AI investment boom is creating enormous new demand for capital. The bond market appears to be worrying about several fires at once.

And then there are equities, apparently enjoying the view.

Stocks have largely shrugged off the surge in yields because earnings remain robust, global growth has held up and enthusiasm for AI continues to support the most influential part of the US market. But the higher yields climb, the more interesting the arithmetic becomes. Treasuries offer increasingly attractive returns without equity risk, while higher discount rates reduce the present value of future corporate earnings. Housing, consumer companies, utilities and other rate-sensitive sectors are already feeling the pressure, leaving market performance increasingly dependent on technology.

How much can AI be asked to carry?

That question may become more important in the fourth quarter. The third-quarter earnings season will soon test whether the enormous capital committed to AI infrastructure is producing profits quickly enough to justify valuations. At the same time, the borrowing required to finance that build-out is itself adding supply to a bond market already digesting enormous sovereign issuance. The technology expected to protect equities from higher rates may therefore also be contributing, indirectly, to the pressure keeping rates high.

There is a certain elegance to that arrangement.

The Fed complicates matters further. Its September increase was the first in three years, and policymakers have signalled that another move may be appropriate before year-end. Markets have recently pared expectations for an October hike, but the broader tightening cycle remains alive because inflation is still too high. If oil continues falling and growth cools, perhaps bond yields finally find a ceiling. But what if the Iran war escalates again, Hormuz is disrupted more severely or another energy shock arrives just as inflation expectations appear to be settling?

Asia has particular reason to watch the answer. Higher US yields pull global capital towards dollar assets and away from riskier markets. Foreign-equity outflows from Asian markets reached an estimated $192 billion through September 25, dwarfing the previous 2025 peak. Current-account-deficit economies have generally suffered greater currency pressure, which then feeds imported inflation and can force domestic central banks to tighten even as growth comes under pressure.

Pakistan hardly needs an introduction to that mechanism. Higher Treasury yields increase the return investors can earn in the safest dollar assets, raising the hurdle for capital flowing towards frontier markets. A firm dollar increases pressure on imported goods and external liabilities, while expensive oil threatens the import bill and domestic inflation. Should all three persist together – high US yields, dollar strength and elevated energy prices – how much room would policymakers in Islamabad really have to insulate the economy?

That is perhaps why the bond market deserves more attention than the record equity indices as the fourth quarter begins. Stocks can celebrate earnings, AI and resilient growth; bonds must continuously price inflation, fiscal credibility, debt supply, monetary policy and geopolitical risk. Lately, they have not seemed especially reassured by any of them.

Perhaps the fourth quarter will be kinder. Oil could retreat, diplomacy could prevail, inflation could soften and bond yields could finally stabilise. The Fed might even discover that September’s tightening has already done enough.

After the third quarter, though, who would want to bet on boring?

Copyright Business Recorder, 2026