Most Fed officials see another hike coming before year-end
Higher global bond yields, led by US Treasuries at multi-decade highs, have reached Government of Canada bonds and fixed mortgage pricing, and markets are weighing a possible Bank of Canada hike on October 28.
On Monday, the 10-year Treasury yield climbed above 5.2%, and Mohamed El-Erian said he expects it to stay around 5% even if the Iran war is settled and oil prices fall.
The Dow dropped 347.11 points, or 0.67%, to 51,481.51, while the S&P 500 fell 0.77% to 7,683.69 and the Nasdaq Composite lost 0.92% to 26,820.38. The 30-year Treasury yield topped 5.5%.
El-Erian's case for a 5% floor
El-Erian, chief economic advisor at Allianz, told CNBC that the energy spike has added to the rise in bond yields, but a larger imbalance between supply and demand will remain.
“The fundamental issue I want to stress [is] that we would be having this yield discussion, even if oil prices were lower,” he said.
He said he is willing to bet the 10-year yield will still be around 5% if the war is resolved.
“We’re not going back to four, four-fifty, four twenty-five, simply because there’s too much of an imbalance in the supply and demand,” El-Erian said.
Markets have also pointed to heavier government borrowing outside the US, and Germany's finance agency expects federal borrowing to reach a record EUR525.5 billion in 2026. Last week, the 30-year Treasury yield reached just over 5.46%, its highest since 2004, and US 30-year mortgage rates rose to around 7%, roughly one percentage point above pre-conflict levels.
Oppenheimer's John Stoltzfus wrote on Monday that recent swings in oil and rates suggest markets are moving toward “a new normal rather than one of heightened volatility and significant downside risk.”
Canadian bond yields climb
Canada's 10-year government bond yield touched a near three-year high of 4% on Sept. 24, then eased to about 3.92% after oil prices fell. It has risen about 75 basis points over the past 12 months, compared with a 10-year Treasury yield above 5.2% on Monday.
Fixed mortgage rates in Canada have also risen. The lowest available five-year fixed rate climbed from 4.09% to about 4.24% during September, and fixed options below 4% disappeared from the market, while variable rates tied to the Bank of Canada's policy rate held relatively stable. Most lenders offer rate holds of up to 120 days for clients who are not yet ready to buy.
Bank of Canada's Oct. 28 decision in view
The Bank of Canada held its overnight rate target at 2.25% on September 2. Its next rate announcement is scheduled for Octoer 28, 2026.
As of September 9, rate markets were pricing a full 25-basis-point Bank of Canada hike by December, with odds of an October move at around one-in-three, according to a Scotiabank Economics note.
Scotiabank added that it would be surprising for the Bank to raise its inflation forecast without also raising rates.
On September 14, the day August data showed annual inflation holding at 3%, two-year Government of Canada yields stood at 2.703%, and the Canadian dollar traded at 71.90 US cents.
BMO Capital Markets chief economist Douglas Porter said markets were pricing a 50/50 chance of an October hike and more than 100 basis points of increases by the end of 2027.
Not all economists expect a move. BMO economist Benjamin Reitzes and RBC economist Abbey Xu both said the August data supported their view that the Bank will stay on hold.
Fed officials lean toward more hikes
The Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75% to 4% on September 16, its first increase since 2023. The decision was unanimous.
Sixteen of 18 Fed officials expect at least one more quarter-point increase before the end of 2026, and the median projection puts the fed funds rate at 4.1% at year-end. The Fed's next decision is due October 27 to 28.
Fed Governor Lisa Cook, who supported the September hike, said on Monday that data could warrant further moves.
She expects inflation pressure “in coming months ... from the AI buildout, as discussed today, and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East.”
Recent US data have shown strong activity. S&P Global's flash services PMI rose to 58.7 in September from 56.5 in August, its highest in nearly five years, and Fed Governor Michael Barr said additional policy adjustments are likely needed in his base case.
Higher borrowing costs for the AI buildout
JPMorgan estimated in June that $4.1 trillion in AI-related debt will be issued through 2030, and those borrowers now face a 10-year Treasury yield up about one percentage point since January.
Advanced Micro Devices fell 3.6% and Meta lost 4.8% on Monday, while Nvidia rose 1.7% after it added $150 billion to its share buyback.That borrowing adds to bond supply. FTSE Russell research published in July shows that debt issuance by hyperscalers, utilities and infrastructure borrowers averaged $28 billion a year from 2020 to 2024 and rose to $121 billion in 2025. The same research found that US government yields near the top of their post-2000 range have historically been followed by stronger returns for fixed income investors.
The August personal consumption expenditures price index is due Wednesday, followed by manufacturing data Thursday and the September jobs report Friday.
