9-15-26: Here Comes the Fed Rate Hike

by Ivan Martchev

September 15, 2026

Ten-year Treasury yields reached 5.01% last week and crude oil hit $104.46 last Friday. Although oil did not close over $100 – nor did the 10-year close above 5% – that does not diminish these dramatic moves.

Most investors take a passing look at where bonds are trading and move on, not realizing Treasury futures have been leading the stock market by the nose. That’s why I follow Treasury yields so closely.

In this first chart, purple is the front-month S&P 500 futures contract over the 10-year Treasury futures contract. As the CPI numbers hit last week, Treasury futures rebounded but lost all their gains for the day, while the S&P futures didn’t lose any gains, which is a change of character, as large moves lower in bond futures (reflecting rising yields) were met by large lower moves in stocks, or vice versa. That’s a positive.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The low in Treasury futures (which trade in 32nds of a point) was 105’29, which corresponds to a yield of 5.01%, reflecting the overall pressure on the Treasury market of late. It was incorrectly reported in the media that the 10-year never reached 5% on Friday because they all used different quoting services and Treasury bonds have different coupons (when issued at different times) making the exact yield at 8.30 am less precise. Because the CME has the most liquid 10-year Treasury futures contract, the lowest price (at the highest yield) on Friday corresponds to a yield of 5.01%, breaching the important 5% “barrier.”

The pressure on Treasury yields is emanating not only from U.S. inflation numbers but overall pressure on global bond yields, which are making similar moves. Japanese 10-year JGBs recently traded at 30-year highs over 3%, while Germany’s 10-year bonds traded over 3.5%, last seen in 2009. This is due to mounting government deficits and elevated energy prices stemming from the wars in Iran and Ukraine, pushing global diesel to all-time highs. European (and many Asian) natural gas markets depending on Hormuz LNG flows trade at 10x U.S. prices, where natural gas is plentiful and flows via pipelines.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The 2-year U.S. Treasury yield, which tends to lead Fed policy moves, closed Friday at a new 2026 high at 4.63%. The Fed funds rate is lower, at 3.75%. While the 2-year note does not have to exactly match the Fed funds rate, the spread indicates the Fed is late by about three 25-basis point rate hikes.

I don’t think the Fed will hike three times, but I do think they may hike twice. The first Warsh-era Fed rate hike has a very high chance of happening tomorrow, with the second one most likely coming in December, after the elections. The Fed seldom stops at one rate hike, and if they are “behind the curve,” which they are, based on 2-year yields, another rate hike after the one coming tomorrow is likely.

If the Fed hikes on Wednesday – as there are no guarantees here, only likelihoods – the 10-year Treasury yield might get a break from their relentless recent rise. If the Fed does not hike rates this week, we could see 10-year rates rise well above 5%, meaning the Treasury market will in effect be hiking for the Fed.

For the time being, three rate hikes seem unlikely, especially if the Iran war ends in 2026, but the Iranians are using the price of crude oil (and rising Treasury yields as a consequence) as their weapon against the Trump administration. They reactivated their Houthi rebels in Yemen, where “the other Strait” – that of Bab-al-Mandeb – is now harder to navigate, just as the Trump administration was clearing out the mines from the Strait of Hormuz and policing it more effectively. There are also drone strikes on Saudi Arabia coming from Shiite militias in Iraq last week, which is another reason WTI crude oil got above $104.

Given these new developments, it is fair to say the Iranian situation is deteriorating, with the U.S. midterm elections just seven weeks away with the price of diesel in the U.S. reaching an all-time high. If it is true “All is fair in love and war,” in this case the Iranians appear to be avid readers of the Art of War by Sun Tzu as they are exceeding all pre-war expectations as to their array of countermeasures.

President Trump used to say this is just “A little excursion” for six-weeks before the summer, but now it looks like a vacation from hell gone bad, lasting over six months so far. The Iranians appear to be of the opinion that if the Trump administration loses majority support in either Houses of Congress (or both), they will get hamstrung, especially in their war powers. They appear to be moving towards that goal.

The Trump administration could have waited until after the election, say January 2027, to deal with Iran and focused on the election first, as the economy is doing well, but the timing of the Iran war appears to be one of the biggest miscalculations of President Trump’s otherwise illustrious political career.

I think if the war ends this month (which would be a miracle, with a 5% chance, if that), the S&P 500 could go to 8500 by year end as the 10-year would fall relatively quickly towards 4.5% as oil would head towards $75. The stock market is cheaper than when the year started as the S&P 500 has appreciated less than half the expected EPS growth for 2026, shrinking its forward P/E multiple to about 19. Looking at median P/Es, it is even cheaper as the overall multiple is pulled up by mega-cap hyperscalers. The stock market is not expensive but rising interest rates tend to produce a shrinkage of P/Es that is rather notable.

Realistically, I don’t think the war in Iran (or Ukraine) will end this month, so we will likely find where the S&P 500 will be with 5.25% on the 10-year Treasury and $120 oil – both of which are within reach.