Mark Berube, ChFC, CLU, Co-Founder · Ike Fontaine, Co-Founder
Part One: Why Interest Rates Are Going Straight Up
Interest rates are rising in close to a straight line in three countries at once, and the S&P 500 is within 1% of its record. A friend asked me to explain it. This is what the numbers say.
The Move
The US 10-year crossed 5% and the Japanese 10-year crossed 3% in the same month. The average 30-year mortgage is 7.45%.
Why It Is Alarming
Long Treasuries, traditionally considered the safest asset, have been cut in half. TLT, the fund that holds long US Treasury bonds, closed September at 77.30. That is 55% below its August 2020 peak of 171.57 and the deepest loss in the fund's history.
The common thread is debt. The United States owes more than $40 trillion and runs deficits near $2 trillion a year. France's debt is about 118% of its economy. Japan's is more than 200%.
Washington stepped in and it did not hold. Treasury raised its buybacks of long bonds from $2 billion to $4 billion, then to as much as $6 billion. TLT set a record low close of 82.04 on August 13 and has since fallen another 6%.
The Treasury Secretary changed his words. On August 20 Scott Bessent said yields "don't reflect the underlying fundamentals." On August 31 he told CNBC, "I don't believe that I can change the equilibrium price."
Cheaper oil did not help. On September 22 a Saudi pipeline restarted and oil fell below $100. The 10-year rose 26 basis points over the next two days.
Except the Stock Market Doesn't Care
- The S&P 500 ended the week of September 25 just 0.8% below its record.
- The VIX, Wall Street's fear gauge, is 16.39 as I write. That is a calm reading.
- Money has gone into US stock funds for seven straight weeks, according to Bank of America.
- Futures markets put the odds of a Federal Reserve rate hike in October at 73%.
Rates are rising, the Fed is tightening, the long bond has lost more than half its value, and stocks are calm. Part Two is how I tried to explain that, and how many times I got it wrong.
Part Two: The Story
I have watched markets for about forty years. This one fooled me four times before I saw it.
What a Bond Is
A bond is an IOU. You lend the government $100. It pays you a little every year and gives the $100 back at the end.
Now suppose the government offers new lenders a better deal than yours. Nobody will pay full price for your old IOU. That is why bond prices fall when interest rates rise.
Today the long IOUs are worth less than half what they were. So I asked the obvious question. Why isn't everyone scared?
My Four Wrong Guesses
Guess one: the economy is strong. It is. Business activity is at a five-year high. But a strong economy moves short loans. The damage is in the 30-year loans, and those are about a borrower who owes $40 trillion.
Guess two: the government will fix it. Treasury started buying back its own IOUs. Then it doubled the amount. Then it tripled it. The price kept falling, and the man in charge said he can't change where the price ends up.
Guess three: it's the price of oil. Oil fell. Rates went up anyway.
Guess four: stock investors are scared and hiding it. When big investors get scared, they sell. They are buying.
Why I Kept Missing
Every guess assumed one crowd was wrong. Either the bond people were panicking or the stock people were asleep.
I believe markets are efficient. That means millions of people with real money on the line usually get the price about right. I have believed that my whole career, and I forgot it.
If both crowds are right, they must be looking at the same thing from two different sides.
The Race
The United States and China are in a race to build artificial intelligence. Building it takes enormous buildings full of computers, and those cost a fortune.
Four American companies plan to spend about $725 billion on it this year. Moody's expects the bill to reach $1 trillion next year. China's biggest companies will spend about $140 billion this year.
So America is spending five times as much. Stanford University measured the lead that buys: 2.7%.
When you are barely ahead in a race, you do not slow down.
One Bank, Two Borrowers
Picture a town with one bank. Two customers come in every day to borrow.
The first is the government. It owes $40 trillion and needs more every year to pay its bills.
The second is the builders. They are in a race they cannot afford to lose. This summer Alphabet, the company that owns Google, spent more cash than it took in for the first time.
Neither customer will stop borrowing, whatever the bank charges. So the bank charges more. That is why interest rates are going straight up.
Why Both Crowds Are Right
If you own stock, you own a piece of the builders. All that spending is their growth.
If you own a long bond, you are the lender. You are holding an old IOU at the old rate while the bank charges everyone new a higher one.
It is one event. The stockholder gets the growth. The bondholder gets the bill.
What I Am Watching Now
The race runs as long as the builders can borrow. Some smart people are calling the top this quarter. I think they may be a year early, because the biggest year of spending is still ahead.
Here is what would prove them right. In July, lenders charged the AI companies about 1.21 percentage points more than they charged the US government. Other strong companies paid about 0.80.
If that gap gets wider, lenders are getting nervous about the builders, and the clock is running. I check it every week.
My friend asked why nobody cares. They do. Stockholders and bondholders are watching the same race from opposite sides of the track.
Addendum · October 8, 2026
The Builders Go to More Lenders
Days after this letter was written, The Wall Street Journal reported the next chapter of the story.
What the Journal Reported
In Part Two I said the builders were the piece I kept missing. Their borrowing is large enough to move interest rates.
On October 7 the Journal reported that cloud companies have issued hundreds of billions of dollars of bonds for their AI build-outs, "pushing the public debt market to its limits." So the builders are going to other lenders. According to the Journal:
- Broadcom is working to arrange more than $50 billion in financing for the custom AI chip it is developing with OpenAI. Apollo and Blackstone are among the lenders it has talked to.
- SpaceX has talked to lenders about a $40 billion financing for Nvidia chips.
- Oracle is in talks with Apollo and Goldman Sachs to arrange money for a large chip purchase. Investors would likely fund a separate company that buys the chips and leases them to Oracle.
These are talks, not finished deals. The Journal says the Broadcom talks are early and the size could change.
What It Means for the Story
Go back to the town with one bank. The builders did not stop borrowing when the bank got crowded. They went looking for more lenders.
It is the same event, one step further along. Every dollar borrowed becomes an order for chips. The stockholder gets the growth. The bondholder gets the bill.
What I Am Watching Now
I said I check every week what lenders charge the AI companies compared with the US government. That number comes from the public bond market. A private loan, or a loan to a separate company that leases out the chips, does not show up in it.
So I am adding the private deals to the list: who is lending, how much, and whether the deals close.
The math in the letter stands.
Sources
Rates and stocks
- US 10-year, 30-year and S&P 500, week of Sept 25 (thetrading.tools)
- US 10-year crosses 5%, Sept 15 (thetrading.tools)
- 30-year path from June 30 and TLT lowest since 2004 (Benzinga)
- France 10-year yield (Trading Economics)
- Japan Ministry of Finance, daily government bond yields
- 10-year Treasury and JGB yields at highest in decades, Sept 24 (CNBC)
- TLT record low close of 82.04 and 2020 peak (thetrading.tools)
- Bank of America weekly fund flows (Newsquawk)
- September business activity and rate-hike odds (Reuters via Kitco)
- TLT close of 77.30 on Sept 30: Yahoo Finance. VIX of 16.39: market quote, Oct 1.
Treasury and oil
- Bessent on CNBC, Aug 31 (investingLive)
- Bessent's statements, Aug 20 to Aug 31 (Nick Timiraos)
- Treasury buyback increases (The Wealth Advisor)
- Western Asset on the buybacks (Franklin Templeton)
- US debt and deficit figures (InvestData)
- Oil below $100 and the Saudi pipeline restart, Sept 22 (The National)
- 10-year move of Sept 22 to 24 (Digg summary of FT/WSJ)
The AI race
- Financial Times tally of 2026 AI capital spending (AI Weekly)
- Moody's $1 trillion estimate and AI debt spreads (Dow Jones)
- Moody's on Chinese technology spending (Crowdfund Insider)
- Stanford AI Index 2026 (The Next Web)
- Alphabet's first negative free cash flow (Reuters via Virginia Business)
- Addendum: "Oracle, Broadcom and SpaceX Seek Blockbuster Debt Deals to Pay for AI Chips," The Wall Street Journal, Oct 7.
Important Disclosures
Patriot Advisory Group LLC, dba Quantum Capital, is a registered investment adviser. RIA Registered State of NH. Registration does not imply a certain level of skill or training.
This letter is for general educational and informational purposes only. It is not investment, tax or legal advice, it is not a recommendation or an offer to buy or sell any security, and it does not take into account any reader's objectives, financial situation or needs. Consult a qualified professional before making any investment decision.
The views expressed are the opinions of Mark Berube as of October 1, 2026, and in the addendum as of October 8, 2026, and are subject to change without notice. The firm has no obligation to update them.
This letter contains forward-looking statements, including estimates of future spending and views on the timing of market events. Forward-looking statements are not guarantees. Actual results may differ materially. The financings described in the addendum are reported discussions that have not closed and may not occur as described.
Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal. Bond prices generally fall when interest rates rise.
Data and quotations come from third-party sources believed to be reliable, listed above. The firm has not independently verified them and does not guarantee their accuracy or completeness. Links to third-party sites are provided for reference only. The firm does not control or endorse their content.
References to specific companies, funds or securities (including Alphabet, TLT and the companies named in the addendum) are for illustration only and are not recommendations. The firm, its principals and its clients may hold positions in securities discussed. Indexes such as the S&P 500 and the VIX are unmanaged and cannot be invested in directly.
The firm's Form ADV Part 2A, which describes its services, fees and conflicts of interest, is available on request and at adviserinfo.sec.gov.
Patriot Advisory Group LLC, dba Quantum Capital | RIA Registered State of NH
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