By Douglas Porter

September 25, 2026

Another week, another jarring ratchet higher in global bond yields. For the 11th time in the past 13 weeks, the benchmark U.S. Treasury 10-year yield stepped higher, this time poking above 5.2% for the first time since 2007. Thirty-year yields touched 5.5% for the first time since 2004. For perspective, that compares with annual averages in 2025 of roughly 4.3% and 4.8%, respectively — a large move, but far from historically unusual. Other financial markets are latching onto that latter point, with equities barely nodding at the relentless rise in long-term rates, at least for now.

Even with a mid-week stumble, the S&P 500 is within 1% of its peak and actually managed to rise for the week. True, the breadth is troubling, and smaller cap stocks are suddenly struggling—the Russell 2000 is down more than 7% from the August high—but the broad indices remain remarkably calm in the face of the yield storm. The same goes for the credit market, with corporate spreads behaving well. In the currency market, the U.S. dollar bounced more than 2% broadly in the past two weeks but has barely budged on net over the past year.

Zero mystery on the proximate cause of the near-vertical climb in yields in the past quarter, with energy prices flaring anew. Brent oil finished up from the prior week near $105, the third week in triple-digit terrain. Certainly $100+ oil is nothing new, but markets are also closely focused on product prices, and current diesel prices are now above $6.50/gallon. While not quite climbing the stairway to seven yet, those prices are up nearly $3 in the past year alone, a jump of nearly 80%.

That surge is keeping monetary policymakers on edge, as they were already on high alert for any signs of spillover into other prices. And, the risk doesn’t get much higher than from a spike in diesel costs. Diesel has also caught the attention of other U.S. policymakers, with many calling for an export ban. (No doubt that could clip near-term domestic diesel costs, but it could actually put upward pressure on other product prices as refiners are dealt with a sudden U.S. glut of diesel.)

Combined with a variety of hawkish remarks from Fed speakers, many of whom pointed to the need for further policy adjustments (with the emphasis on the plural), markets cranked up the odds of a near-term hike. Previously seen as a close call, the October 28 FOMC rate decision is now clearly seen as a hike, and 50 bps are almost fully baked in by early next year.

Even some of the prior doves (notably Barr and Williams) are suddenly talking tough, aggravating the back-up in yields across the curve. In turn, long-term mortgage rates have indeed climbed the stairway to 7%. Note though that while a good headline, 30-year mortgage rates had actually averaged above 7% for a full year up to the middle of 2024, so this is hardly uncharted terrain. Still, it will no doubt throw a further chill into an already icy U.S. housing market, where existing sales have been stuck at levels rivalling the extreme lows in 2009.

Beyond the near-term pressure from energy prices and a hawkish Fed, yields are also climbing on signs that the U.S. economy is, if anything, firming (in the words of Richmond Fed President Barkin). Jobless claims remain anchored at multi-decade lows below 200,000, and the ADP data suggest private sector job growth is grinding up and averaging gains equivalent to about 80,000 in the past month.

Consensus is looking for a 100,000 rise in September payrolls (due next Friday), in an economy that has seen an outright drop in the labour force in the past year. Meantime, durable orders were solid through the summer, and early PMIs suggest activity picked up meaningfully this month, both at factories and for services. Quite simply, the AI spending boom is just rolling over any dampening effect of high energy prices and rising interest rates—a clear signal that the Fed will choose to do more.

Canada’s economy is quietly echoing those same themes. While the AI build-out is still having a much milder effect in Canada, that activity is stirring. For example, real construction activity in the industrial group is up almost 6% y/y, after falling by a similar amount in 2025. Consumers are also hanging in surprisingly well in the face of the oil shock and the trade uncertainty, with retail sales reportedly snapping back up 1.3% in August after a 0.7% slip in July.

Zero mystery on the proximate cause of the near-vertical climb in yields in the past quarter, with energy prices flaring anew.

And most signs suggest that the economy rebounded last month, after what will likely be a soggy July—next week’s GDP is projected at flat for that month, but the August flash may be much firmer. However, we would be quick to warn that most of these figures will be B.T.F.—before the latest flare-up in trade frictions. The early readings from September suggest that sentiment took a serious spill this month, with the CFIB reporting that small- and medium-sized businesses turned much more cautious.

Despite the cloudy near-term outlook for Canadian growth, markets have become increasingly convinced that interest rate hikes are right around the corner. BoC Governor Macklem gamely provided both sides of the argument at a talk in Halifax on Monday, noting that the latest back and forth on tariffs will chop Q4 economic growth in half to just 0.75%, widening the output gap even further. While he noted that this could put downward pressure on inflation, that reality may well be overwhelmed by the relentless strength in energy costs.

As the Bank of England’s Governor Bailey put it—and the BoE has also been staying on the sidelines for now—”It’s going to get harder to maintain that stance the longer we have high energy prices”. Markets fully believe this applies to the BoC as well, leaning to a hike in October, and two by late January, largely mirroring Fed expectations.

We would readily allow that it will require probably both a friendly CPI report on October 19 and some serious backing off in energy prices to stay the Bank’s hand. But we suspect that even if energy prices do eventually force the issue, and prompt rate hikes, the Bank could easily be reversing course next year, presuming oil prices eventually come back down the mountain. That’s because we will likely still be dealing with the shadow of trade uncertainty and tariffs on key sectors.

(Sidebar: A little noted comment this week was by Governor Gavin Newsom, and potential Democratic candidate in 2028, that tariffs may not go away even with a new Administration, although U.S./Canada relations would see a dramatic change.)

And, potential growth in Canada is still lacklustre, with productivity crimped by the trade strains in key sectors, and population growth barely above zero. Even with a notable upward revision to the past year, population was still up just 0.5% y/y in mid-2026, the slowest growth since WW I. Against that backdrop, the market’s pricing of more than 100 bps of hikes to above 3.5%—or above anyone’s estimate of neutral—simply makes no sense.

Late September is a great time for sports fans as the NFL is gearing up, the baseball regular season draws to a close, and the NHL prepares to begin.

And that synchronicity between baseball and hockey was especially strong in Toronto in the past year. With some shameless Toronto-centric analysis here, but the parallels between the Jays and Leafs in the past two years is uncanny. In 2025, both teams had one of their best seasons ever, won their divisions, and only succumbed in the playoffs to the ultimate and two-time champs in seven games. Then in the off-season both lost their putative second-best player (Marner/Bichette), who were arguably their best players.

In 2026, both teams were plagued by injuries, and both saw their putative best player have their worst season ever, and both teams promptly sunk to last place in their division. And, yet, both continue to draw amazing attendance, another sign of consumer resiliency. On that note… Go Leafs?

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.