Original title: QuantStreet October 2026 Letter: Interest Rate Worries
Original author: Harry Mamaysky | QuantStreet Capital
Editor's note: In September, the U.S. bond market experienced a sharp selloff. The 10-year Treasury yield rose from 4.75% to 5.29%, up 54 basis points in a single month, with some fixed income assets falling by 2.3% to 5%. But if you break down the change in yields, you will find an easily overlooked fact: over the same period, the 10-year real rate rose by about 49 basis points, while market-implied inflation compensation rose by only about 5 basis points. In other words, this bond selloff is not mainly explained by rising inflation expectations; what truly changed substantially was the real rate.
This raises a more complex question: why is the market willing to demand a higher real return? Typically, a rise in real rates may be related to stronger economic growth expectations, adjustments in the future path of monetary policy, or a higher risk compensation for holding long-term bonds. More unusually, while Treasuries fell sharply, AI-related technology stocks remained strong, with semiconductors leading the gains, while most other stocks came under clear pressure.
In his latest monthly investment letter, QuantStreet Capital founder Harry Mamaysky offers one explanation: the market may be repricing stronger future economic growth and the capital demands generated by large technology companies' continued expansion of AI infrastructure. Under this framework, higher rates and strong AI stocks are not necessarily contradictory, because investors may believe that future earnings growth will be enough to offset the impact of higher financing costs and discount rates.
But this is still a market explanation awaiting verification. A rise in real rates does not equal a certain improvement in growth prospects, and changes in the term premium also mean investors may be demanding higher risk compensation. For both the stock and bond markets, the key is to distinguish: does this rise in rates reflect higher future economic returns, or does it mean that holding long-term assets has become more expensive and more dangerous?
Below is the translated original text:
In September 2026, a rather unusual set of moves appeared in U.S. financial markets: Treasuries suffered a sharp selloff, while technology stocks, especially semiconductors, continued to rise.
Major asset performance in September 2026: technology and momentum strategies were relatively strong, while many categories of bonds and rate-sensitive assets came under pressure.
According to U.S. Treasury data, the 10-year Treasury yield rose from 4.75% at the end of August to 5.29% at the end of September, up 54 basis points in one month. QuantStreet Capital statistics show that some U.S. fixed income assets fell by 2.3% to 5% that month.
But stocks did not experience a synchronized, broad-based decline. Bitcoin and momentum strategies with significant holdings in semiconductor and technology companies stood out, and the Nasdaq index remained higher. At the same time, U.S. small- and mid-cap stocks, the equal-weighted S&P 500 index, and rate-sensitive sectors such as REITs, utilities, and financials were sold off.
Normally, a sharp rise in long-term rates raises corporate financing costs and lowers the discounted value of future profits, which is especially unfavorable for highly valued stocks. But the divergence in the market this time suggests that investors may be pricing the future returns of different assets very differently.
QuantStreet founder Harry Mamaysky believes that to understand this market move, one must first answer a question: what exactly is the bond market trading?
I. The September surge in Treasury yields was really a rise in real rates
From the perspective of the yield structure, an important feature of the September Treasury selloff was that nominal rates rose mainly in line with higher real rates, rather than a simultaneous surge in inflation compensation.
To understand this, one must first distinguish three concepts.
Nominal Yield is the Treasury yield investors usually see, which includes compensation for future inflation as well as required real returns and other risk factors.
Real Yield can be understood as the yield after deducting inflation compensation. In the U.S. Treasury market, the yield on Treasury Inflation-Protected Securities (TIPS) is usually used to observe the market's pricing of real returns.
The difference between the two is the Breakeven Inflation Rate, often used as a reference indicator of the market's long-term inflation expectations. However, it also includes factors such as inflation risk and liquidity, and is not equivalent to a pure inflation forecast.
The change in Treasury yields in September can be further decomposed. The 10-year Treasury nominal yield rose from 4.75% on August 31 to 5.29% on September 30, up 54 basis points. Of that, the real yield rose from 2.44% to 2.93%, up 49 basis points; implied inflation compensation rose only from 2.31% to 2.36%, up 5 basis points.
Performance of major U.S. bond ETFs in September: long-term Treasuries and some credit bonds came under clear selling pressure.
This means that more than 90% of the increase in the 10-year Treasury yield in September corresponded to a rise in real rates, rather than an increase in inflation compensation. At least from this decomposition of market indicators, the main change in the September bond selloff was not inflation compensation, but real rates.
This is especially important because rises in real rates and inflation compensation often correspond to different economic explanations.
If the rise in yields mainly comes from inflation compensation, it may mean investors are worried about future price increases and a decline in the purchasing power of money, and therefore demand a higher nominal return. But if the rise mainly comes from real rates, then one must further consider economic growth expectations, the future real policy rate, and the risk compensation investors require to hold long-term bonds.
This does not mean inflation risk has disappeared. The inflation level itself remains elevated, and oil prices, fiscal policy, and the Federal Reserve's rate path will also affect market expectations. But judging from the yield changes in September, explaining this Treasury selloff solely by "heightened inflation concerns" is clearly insufficient.
II. It is not simply inflation worry; the market may be repricing economic growth and capital demand
Why did real rates rise significantly? In his investment letter, Mamaysky discusses several market explanations.
The first is that dollar credit is being questioned. But the dollar actually appreciated in September, which does not fit the narrative of a broad crisis of confidence in dollar assets.
The second is that investors have begun to worry about the U.S. government's ability to repay its debt. The author believes that if the market's concerns about U.S. fiscal credit were mainly reflected through future inflation risk, then long-term inflation compensation should have risen more noticeably, and the September data did not show this characteristic.
However, this does not rule out fiscal risk. Increased Treasury supply and higher risk compensation for holding bonds could also push up long-term yields while inflation compensation remains relatively stable.
By contrast, Mamaysky prefers to focus on another explanation: the market may be expecting stronger economic growth while repricing the growing capital demands of large technology companies.
The key variable here is AI. As investment in artificial intelligence infrastructure continues to expand, large cloud service providers (Hyperscalers) are investing enormous sums to build data centers, purchase GPUs, expand computing power, and deploy power and network infrastructure.
These expenditures first mean demand for capital.
From a macro perspective, if companies want to expand investment at the same time, while the long-term funds available for allocation do not increase in tandem, the price of funds may face upward pressure. At the same time, if investors believe AI will raise future economic productivity and create more corporate profits, they may also raise their required long-term real rate of return accordingly.
Both forces may be related to higher real rates, but the mechanisms are not exactly the same: the former emphasizes capital demand and financing conditions, while the latter emphasizes expectations for future economic returns.
Recent ING research also points in a similar direction, arguing that AI's impact on bond yields comes not only from technology companies borrowing to finance themselves, but may also be reflected in real rates through productivity and long-term economic growth expectations.
However, this type of judgment still belongs to market analysis, rather than a confirmed causal relationship. A rise in real rates itself cannot prove that AI is driving faster U.S. economic growth, nor can it prove that AI financing demand is the dominant factor in the Treasury selloff.
For Mamaysky, the appeal of this explanation mainly comes from the stock market's reaction.
If the sharp rise in Treasury yields fully reflected a deterioration in the economic outlook, then the stock market would usually also come under broader pressure. But in September, AI-related stocks such as semiconductors remained strong, showing that investors remain optimistic about the long-term growth of at least some technology companies.This leads to a more interesting relationship between the bond market and the stock market: higher real interest rates may be being priced by the market at the same time as higher future earnings expectations.
III. Why can AI stocks still rise when real interest rates are higher?
From the perspective of traditional valuation logic, rising long-term real interest rates are usually not good news for growth stocks.
Stock prices essentially depend on the value of future cash flows after discounting. The higher the return the market demands, the lower the value of a company's future profits when converted into today's terms. For growth companies whose profits are concentrated in the future, this effect is usually even more pronounced.
But the performance of AI stocks in September suggests that the market may be betting on another force.
In September, the semiconductor ETF (SMH) rose about 9.4%, while the equal-weighted S&P 500 index (SPW) fell about 4.8%, showing a clear divergence between the technology sector and the broader market.
Mamaysky interprets this as a "battle between the numerator and the denominator" in valuation: a rising discount rate pushes up the denominator and puts pressure on valuations; but expected future profit growth pushes up the numerator and may offset part or even all of the negative impact. In other words, the market is not necessarily ignoring higher interest rates, but may believe that the future earnings growth brought by AI is enough to cover a higher cost of capital.
In September, momentum ETFs with important holdings such as AMD, Micron, Intel, Cisco, and Applied Materials performed strongly, and semiconductors continued to be an important force driving the market higher.
This trend has a certain fundamental logic. AI infrastructure construction first requires chips, servers, and related equipment, so upstream suppliers in the industrial chain can obtain orders and revenue earlier.
But this also leads to the author's biggest concern. Semiconductor stocks continued to rise, while the equal-weighted S&P 500 index performed weakly. This shows that there is a clear divergence between capital's expectations for the earnings prospects of AI infrastructure suppliers and its expectations for the broader corporate sector.
Mamaysky calls the broad group of companies outside semiconductors ROCS (Rest of the Corporate Sector), that is, the rest of the corporate sector.
In his view, the companies buying AI chips are willing to invest large amounts of capital because they believe they will be able to obtain economic returns in the future through productivity gains. The market is also willing to provide financing in advance for these profits that have not yet been realized.
Therefore, it is not surprising that synchronous growth across all industries is not being seen at this stage. What is truly puzzling is that the stock market itself is forward-looking. If investors are already convinced that AI will significantly improve the future profitability of other companies, then these expectations should also gradually be reflected in the valuations of the relevant companies.
But in September, the market did not show this kind of broad-based rise. Chip suppliers are already making money, but the companies buying chips have not yet generally achieved corresponding profit improvements. This means that the current AI trade has a commercial loop that needs to be verified: the revenue obtained by upstream companies ultimately needs to be supported by economic value continuously created by downstream companies. If AI cannot create enough profits for the broader corporate sector, continuously increasing chip procurement, data center construction, and financing costs may gradually erode investment returns.
Mamaysky does not believe that AI has already formed a bubble. He still believes in the long-term economic value of AI, but believes that the market needs to see more evidence that the benefits of AI are spreading from the technology industry to other companies.
Labor productivity data released by the U.S. Bureau of Labor Statistics has already shown some positive signs, with productivity growth in recent years higher than the long-term average since 2010. But this improvement cannot be entirely attributed to AI, and even less can it directly prove that companies have already obtained new profits sufficient to cover investment costs. From this perspective, the bond market and the stock market are actually waiting for the same answer: can future economic growth deliver the returns currently priced in advance?
Historical changes in labor productivity in the U.S. nonfarm business sector.
IV. Rising real interest rates are not necessarily a positive signal; term premium is another risk
Interpreting the rise in U.S. Treasury yields as the market becoming more optimistic about economic growth can indeed explain part of the asset price performance. But this explanation still has an important limitation: a rise in real interest rates does not entirely equal an improvement in future economic growth expectations.
Long-term Treasury yields not only reflect investors' expectations for future short-term interest rates, but also include the term premium, that is, the extra compensation investors demand for bearing risks such as long-term bond price volatility.
The term premium can reflect interest rate uncertainty, fiscal supply, market supply and demand, and other risk factors. Even if inflation compensation has not risen significantly, long-term yields may still rise as long as investors are unwilling to lock up funds for the long term and demand higher risk compensation.
This distinction is especially important in the current market.
A Reuters market analysis on October 7 pointed out that the term premium on the U.S. 10-year Treasury has risen to about a 12-year high. This shows that the rise in long-term yields may not only include economic growth expectations, but may also reflect investors' reassessment of fiscal policy, monetary policy, and the risks of holding long-term debt.
It should be emphasized that real interest rates and term premium are not two independent indicators that can simply be added together. The TIPS real yield itself may also include a real term premium. Therefore, the roughly 49 basis point increase in real interest rates in September does not mean that all 49 basis points came from stronger growth expectations.
Two different drivers may have different effects on asset markets. If the rise in real interest rates mainly reflects improved economic growth expectations, then corporate future profits may rise in tandem, and some stocks can withstand a higher discount rate.
But if the rise in real interest rates and long-term yields comes more from term premium, then companies may face continuously rising financing costs without a corresponding improvement in future earnings. In that case, higher interest rates will put more direct pressure on stock valuations, bond prices, and corporate investment.
This is also why one cannot conclude solely from the rise in AI stocks that this round of U.S. Treasury selling is necessarily a positive signal for economic growth. For QuantStreet, the current market does not yet have enough evidence to support a full shift into any one asset.
The institution remains relatively overweight value stocks and low-volatility stocks, hoping to retain exposure to the broader corporate sector, while continuing to hold some technology stocks in portfolios with higher risk tolerance.
Bond allocation has also begun to see slight adjustments. Mamaysky believes that when the 10-year U.S. Treasury yield reaches about 5.25%, the potential attractiveness of bonds has already improved somewhat. Therefore, QuantStreet has begun to moderately extend duration in low-risk portfolios, that is, increasing allocations to bonds that are more sensitive to interest rate changes.
But this does not mean that the institution has fully turned bullish on long-term bonds. Its model still does not favor longer-duration assets, and overall bond duration remains below benchmark, but the underweight has narrowed somewhat.
The author also mentions that for suitable investors, some alternative assets such as certain evergreen private equity funds may provide some diversification, but the liquidity and valuation risks of the related products still need to be considered separately.
These adjustments reflect a cautious attitude: long-term yields have begun to have some appeal, but there is no clear answer yet as to whether the forces driving yields higher have faded.
Next, the market needs to watch three types of signals: first, how long-term real interest rates and term premium change, in order to distinguish between growth expectations and risk compensation; second, whether AI investment begins to truly improve productivity, profit margins, and cash flow at non-technology companies; and finally, whether Federal Reserve policy expectations, fiscal financing needs, and long-term Treasury supply continue to put upward pressure on yields.
If economic growth and corporate earnings continue to improve, high real interest rates and strong stocks may coexist for a period of time. But if term premium keeps rising while the returns on AI investment are slow to materialize, the technology stocks that currently appear able to withstand higher interest rates will also face a more severe valuation test.
The most important signal from the September U.S. Treasury selloff is not that inflation expectations are out of control again, but that the long-term real return investors demand has risen significantly.
The truly unresolved question is: does this higher required return come from confidence that the future economy can create more profits, or is the risk of holding long-term assets increasing?
Both explanations can push up U.S. Treasury yields, but they imply completely different market prospects for stocks, bonds, and the AI investment cycle.