The warning began in the bond market. On Monday, the benchmark 10-year Treasury yield briefly breached 5%; by Tuesday it had climbed again, rising more than six basis points to 5.025%, its highest level since 2007. The 30-year yield also advanced to 5.384% as a sell-off in government debt intensified before the Federal Reserve’s policy meeting.¹

The immediate case for higher yields is straightforward: inflation remains above the Fed’s 2% target and traders were assigning more than a 92% probability to another quarter-point increase. Jonathan Liang of Standard Chartered said 10-year Treasurys remain “highly sensitive to inflation expectations,” a relationship he expects to persist.¹

Oil has sharpened that anxiety. With crude prices elevated, Steve Sosnick of Interactive Brokers argued that “higher oil prices lead to higher inflation expectations,” and said firm oil prices would keep adding pressure to interest rates.¹

For equities, the move is no longer a distant macroeconomic concern. The 10-year yield reached 5.04%, raising borrowing costs for households and companies alike and making safer government debt a more credible alternative to stocks.² Higher rates can squeeze corporate profits, slow growth and lower the valuations generated by the discounted-cash-flow models used across Wall Street.

Yet the stock market has not capitulated: the S&P 500 remained up 10.8% for the year through Tuesday’s close and still near its recent record. That resilience is precisely what makes the next step consequential. Bank of America’s fund-manager survey identified a “disorderly rise in bond yields” as September’s biggest tail risk, overtaking fears of an AI bubble, while JPMorgan analysts said investors were nervous about inflation and yields.²

The Fed’s decision is now the immediate catalyst. But as Bank of America strategist Ralph Axel put it, if oil prices keep rising or conflict drags on, “central banks will hike more and more.”²