Talking Points

May 15, 2026 | 12:00

The Yield Also Rises

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

Welcome to the big leagues, Mr. Warsh. The freshly-confirmed Fed Chair assumes his new role in the midst of rapidly rising inflation concerns, which have sparked a significant sell-off in bond markets globally. The sustained back-up in long-term yields has finally broken the preternatural serenity in equities, which saw the S&P 500 crack the 7,500 level for the first time on Thursday. A series of increasingly problematic U.S. inflation readings for April was capped by a late-week run-up in oil prices to nearly $105, and aggravated by mounting fiscal concerns in some major economies. A side dish of political uncertainty in Britain has further fanned the sell-off in Gilts, arguably the epicentre of bond market woes. This week’s much-hyped U.S.-China Summit may have generated a few sales of soybeans and jets, but did nothing to open the Strait of Hormuz—and, simply, it’s the lack of oil flow and its inflation implications that are the number one concern for markets.

The bond market sell-off was led by Britain, where 10-year yields shot up more than 25 bps this week to above 5.15%, the highest since 2008 and about 50 bps higher than the peak in the 2022 Liz Truss fiasco. A new bout of political turmoil is making a tough situation worse, with PM Keir Starmer clinging to his post following a rough result for Labour in local elections. But the U.K. is far from a rogue outlier, as Japan’s long-term yields have rocketed amid a slumping yen, with 30-year yields flirting with 4% (they had a 1-handle less than two years ago) and 10s punching above 2.7% after a decade of averaging almost zero. Even bond markets with better fiscal fundamentals and/or somewhat milder inflation trends are being caught in the yield upswing, with German 10-year bunds rising 13 bps this week to 3.14%, up 50 bps since the war began.

U.S. Treasuries were naturally right in the thick of the global sell-off, with 10-year yields punching above 4.55% on Friday, up 20 bps in a week and now up almost 60 bps from pre-war lows. While the global back-up did no favours, there were plenty of homegrown concerns driving yields higher as well this week. The all-important April CPI kicked off proceedings, coming in a bit hot with core prices rising 0.4%, lifting the annual rate two ticks to 2.8%. The headline inflation rate was 3.8%, its highest in almost three years and a tad above consensus. While that didn’t fuss markets much, the concern is that the ongoing upward pressure in oil and, thus, gasoline continues in May, which would push headline inflation above 4% in next month’s read. Not helping, the PPI came in very hot, with the headline jumping 6.0% y/y, and even core was much higher than consensus at 5.2% y/y. Import prices added some insult to that injury by soaring 1.9% in April, lifting the yearly rate to 4.2%.

Meantime, most of the growth indicators suggested that activity is holding up. Notably, retail sales matched expectations with a 0.5% advance last month, on top of the 1.6% pop in March. True, the results are fattened by higher pump prices and the associated spending at service stations. But even ex-gasoline, sales were up 0.3% in the month and 3.7% y/y, with consumers supported by tax refunds and wealth gains flowing from record equities. Manufacturing activity rose 0.6% in April, and has managed a respectable 1.2% volume gain over the past year. A jump in the Empire State factory survey to a four-year high in May points to further gains, no doubt aided by the relentless AI spending boom.

Where do these many cross-currents leave the outlook for Fed policy, as Kevin Warsh assumes the mantle? In his testimony to the Senate, the incoming Chair presented a vision of how an AI productivity boom could dampen inflation and thereby open the door for lower short-term rates. He has also made the case in the past that reducing the Fed’s balance sheet could be countered by lower short-term rates. While these are the stuff of interesting academic debates, the reality on the ground for the U.S. economy is headline inflation of almost 4%, core inflation near the very top of the acceptable zone, a job market that seems to be firming, a consumer that keeps spending, and an equity market that (almost) won’t quit.

Accordingly, the bond market is voting against Mr. Warsh and the prospect of near-term rate cuts—indeed, it’s now pricing in strong odds of a rate hike by early next year. The persistence of oil prices above $100, and the seeming absence of a near-term exit route from the Strait closure has prompted a forecast change on the Fed call. Running against the market, we still look for two trims in the coming year, but now see the first cut only at the very end of 2026, and the second early next year (both pushed back three months from the previous view). But, clearly, that call is predicated on the Strait reopening in the next few months, and oil retreating reasonably heavily by later this year. Suffice it to say, our conviction on that view is weakening by the day.

In an otherwise quiet week on the data calendar ahead, the big event in Canada is the CPI for April. Gasoline prices will of course loom large, with pump prices rising another 8% last month, even with a cut in the federal gas tax on April 20. That consumer-friendly measure was almost immediately swallowed whole by another lurch higher in wholesale gasoline costs, inflamed by some further softening in the Canadian dollar. Adding to the mix, the consumer carbon tax was removed in April 2025, making the year-on-year comparison less favourable. So, after rising a moderate 5.9% from year-ago levels in March, gas prices are going to spike almost 29% y/y in April’s CPI. That factor alone will be enough to drive headline inflation above 3% from a contained 2.4% in the prior month.

That jump in headline inflation, and the prospect for some further pressure next month, is all the market needs to keep on pricing in strong odds of Bank of Canada rate hikes later this year. This week’s Focus Feature delves deep into the many, many reasons why we believe raising rates would be a policy mistake. Our view is that the conditions are just not there to have core inflation erupt like they did four years ago, and that the oil price shock will not fan out to broader inflation. But, like King Canute, we won’t pretend that we can hold back the tide, not when the BoC itself believes that a series of rate hikes may be required to contain inflation. And, despite our many protestations, it may simply come down to the fact that the central bank does not want to face the possibility of having underlying inflation flare higher on two separate occasions under its watch.

The final point we’ll make is that Canada has certainly not escaped the global bond sell-off. Thirty-year yields are flirting with 4%; they touched that level on one day in late 2023, but haven’t otherwise been there since 2010. The important five-year yield has jumped above 3.3%, its highest level in almost two years and is now up more than 65 bps since the start of the war. That will put upward pressure on mortgage rates and further dampen a soggy housing market, thus tightening conditions notably without the Bank of Canada even lifting a finger.