The U.S. is in a much different place now than it was in 2002. Back then, the country was still recovering from the terrorist attacks on Sept. 11, 2001. The stock market was still reeling from the bursting of the dot-com bubble. However, there is one striking similarity between now and then — ultra-high bond yields.
On Wednesday, Oct. 7, 2026, the 10-year U.S. Treasury yield reached 5.36%, the highest level since 2002. Although the yield pulled back somewhat over the next couple of days, it’s still near the 24-year high.
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This elevated 10-year Treasury yield has a major implication for the stock market. History says that investors should do one thing.
Image source: Getty Images. Image source: Getty Images.
Why yields are surging
Several factors are converging simultaneously to push 10-year Treasury yields (and yields of other Treasury bonds) to multi-decade highs. One key driver is persistent inflation. The ongoing Iran war has caused oil prices to rise sharply, which has, in turn, created broad inflationary pressure.
The Federal Reserve’s response to higher inflation has been to raise interest rates. When rates rise, so do bond yields. Furthermore, most market observers anticipate that the rate-hike cycle isn’t over. CME Group‘s (NASDAQ:CME) FedWatch estimates an 86% probability of another rate increase when the Federal Open Market Committee (FOMC) meets in December 2026.
Meanwhile, the U.S. federal budget deficit for fiscal year 2026 reached $1.993 trillion. This debt must be funded by issuing Treasury bonds. As the supply of these bonds expands, higher yields are needed to attract investors.
Treasury bonds are also competing with roughly $489 billion in debt issued by companies building artificial intelligence (AI) infrastructure. Again, more supply means higher yields.
What stock investors should do
Bond markets directly impact the stock market. When relatively risk-free 10-year Treasury yields are high, stocks must offer higher returns to compete. If they can’t, stock prices will fall.
The stock market’s valuation makes it more challenging to deliver those higher returns. The S&P 500 (SNPINDEX:^GSPC) Shiller CAPE (cyclically-adjusted price-to-earnings) ratio is near its highest level since early 2001.
