Interest Rate Weekly · 2026-07-27 to 2026-08-02

One-line summary: The main theme last week was "US inflation and an internal Fed shift toward hawkishness pushed up medium- and long-term yields while the short end fell back after a hold; the curve continued to steepen; Canada broadly followed but with milder moves, and divergent inflation signals between Europe/US and Asia-Pacific strengthened cross-country rate divergence."

1. Review of Last Week

US signals were the most concentrated and most directly explained the curve shape changes this week. On the news front, on 7/29 the Fed left rates unchanged, but the meeting was widely reported as a "divided decision", "good family fight", "3 dissenters", and "rare uncertainty", indicating that policy deliberations over inflation versus growth have not converged and instead showed more pronounced internal disagreement. Several reports that same day mentioned that Middle East developments could lift inflation, meaning that a "pause in tightening/holding rates" does not equate to a shift to easing. From 7/29 to 7/31 the market narrative quickly tilted hawkish: Lorie Logan and Beth Hammack were said to "run the Fed for now", "Fed silence leaves markets flying blind", "Fed hawks are on the war path", and mortgage rates were pushed higher. The Q2 GDP and inflation reports on 7/30 reinforced this: domestic private sector demand is still strong on an "inflation-adjusted" basis, inflation in the overall economy in Q2 was "really bad, even without Energy", and the coexistence of "Red-Hot Inflation" and strong demand provided fundamental fuel for long-end yields to rise. By 8/2, news that the 30-year UST yield touched 5.28% served as a concentrated confirmation of the week's pricing logic.

Curve data were highly consistent with the above news, but different maturities reacted differently. US 2-year yield fell 14bp during the week to 4.23%, 5-year fell 8bp to 4.38%, 10-year fell only 3bp to 4.68%, while the 30-year rose 4bp to 5.21%. This means that although the short end retraced after the Fed hold and some event-risk easing, the long end barely followed and in fact held high or continued to push up under narratives around fiscal issues, inflation, term premium, and supply concerns. The result is US 2s10s at +45bp, shifting further from the typical inversion regime toward positive slope, showing clear bear steepening characteristics. More importantly, on 20-day and 60-day scales, nearly all UST maturities have risen: 2-year 20-day +6bp, 60-day +28bp; 5-year 20-day +14bp, 60-day +30bp; 10-year 20-day +20bp, 60-day +23bp; 30-year 20-day +24bp, 60-day +19bp. In other words, the intraweek short-end decline looks more like an event-driven pullback, while the main trend over the past 1–3 months remains an upward shift across the curve, with the long end stronger.

US long-end strength is also accompanied by elevated valuation pressure. Current 1-year z-scores rise from 2-year 1.98 up to 30-year 2.59, indicating absolute yields are at high percentiles over the past year, especially for the 10- and 30-year. Headlines such as "Six Years into Bond Bear Market", "Spreads Are still too Narrow", and "Shot From The Bond" can all be read as a continuation of market repricing toward higher rates and risk premia: rates are higher, but credit spreads have not widened sufficiently, so the buffer between risk assets and rate assets is limited. Data support this: US_HY_OAS 20-day widened 9bp, US_IG_OAS widened 5bp, but the magnitude is still limited and only indicates marginal deterioration in risk appetite; it is not enough to conclude credit is under deep pressure.

Canada was relatively calm but structurally notable. Canadian yields fell across the curve during the week: 2-year -11bp to 2.85%, 5-year -9bp to 3.19%, 10-year -6bp to 3.59%, 30-year -3bp to 3.99%. Compared with the US, Canada exhibited "synchronous declines across maturities but with smaller falls at the long end", thus also showing some steepening: 2s10s reached +74bp, considerably steeper than the US +45bp. Looking at longer windows, however, Canadian 20-day changes are still broadly up, indicating that like the US, the short-term pullback has not reversed the roughly one-month upward pressure on rates; but on 60-day changes Canada diverges clearly from the US: Canadian 2-year -16bp, 5-year -7bp, 10-year -1bp, 30-year +4bp, far weaker than the US general 20bp-level upward moves over the same period. This suggests that within North America there is not simple synchronicity—US-driven reflation and term-premium repricing have been stronger than in Canada.

Global signals provide context for cross-country divergence. In Europe, on 8/2 there was "EU Inflation Rebounds on High Energy Prices", and on 7/29 there was "ECB wage tracker at 2.7% in Q1 2027, indicating stable negotiated wage pressures." Together these mean: Europe's inflation rebound appears more energy-driven, while wage negotiation pressure is described as stable rather than re-accelerating. This contrasts sharply with the US news that "Q2 inflation is poor even excluding energy." In Australia, on 7/29 "Surprise inflation drop eases chance of RBA rate hikes", further showing that developed-market inflation is not a single global reflation but is regionally differentiated. In Japan, on 8/2 the US Treasury warned it might intervene in USD/JPY; although this is an FX story, it signals rising FX-rate and interest-rate interaction risks: if the dollar and US yields strengthen together, policy responses could be more complex. Finally, news that electronic bond trading supports ICE's trade acquisition more points to structural increases in liquidity and electronification, but it is not a direct directional signal for the next three weeks.

Overall, the key fact last week was not "the Fed held rates," but rather "under a hold, US inflation and internal hawkish narratives pushed the long end to remain pressured while the short end briefly fell back after the meeting and positioning adjustments, resulting in further curve steepening." Canada's rate levels and volatility were materially lower than the US, showing North America is not one synchronous macro pricing. Europe and Australia news also tell us global inflation is not moving in lockstep, implying cross-country yield divergence could persist.

2. Views on Future Rates

Method boundary note: the following judgments are strictly based on the given "proven signals." Only US 2-year and 5-year direction signals labeled 【proven】 can be used to give directional views; US 10-year, 30-year and Canadian tenors are labeled as ≈ random walk and therefore directions are unpredictable and no directional judgement will be offered for them. For these maturities we can only discuss curve shape, relative value and carry+roll static factors, and it must be emphasized: carry is the expected return when yields do not move and does not imply prices will necessarily rise; if yields continue to move higher, price losses can fully offset carry.

1. US short end: direction still biased up, and the intraweek fall should not be mistaken for a trend reversal

From proven momentum signals, US_2Y direction is up, hitting 56.2%, significantly above the 50.4% base rate; US_5Y direction is also up, hitting 53.8%, above the 50.8% base rate. Combined with 20-day and 60-day changes, US 2- and 5-year have been in an upward channel over the past 1–3 months; last week's pullback looks more like a short-term adjustment after the meeting rather than evidence of sustained decline. On the news front, hotter-than-expected Q2 inflation, still-strong demand, publicized Fed internal hawkish disagreement, and higher mortgage rates are consistent with the short end being re-priced upward. Therefore, over an approximately 3-week horizon, the directional view for US 2- and 5-year yields can be maintained as "biased upward."

But note two caveats. First, absolute rates for the 2- and 5-year are not low: 1-year z-scores are 1.98 and 2.17 respectively, indicating they are at relatively high percentiles and trading will be more sensitive to data and wording volatility. Second, short-end repricing upward does not necessarily require immediate Fed action; in a "pause but more hawkish" regime, markets can still raise terminal rate expectations and delay easing, pushing 2- and 5-year yields higher.

2. US long end: direction unpredictable, no directional judgement; static carry remains attractive provided yields do not move materially higher

US_10Y and US_30Y are labeled ≈ random walk, so their direction over the next 3 weeks is unpredictable and no directional call is offered. Do not mechanically extrapolate from headlines like "30-year yield at a new high" to assume continued rises; equally, do not assume reversal because valuations are high. Methodologically, there is no sufficiently verifiable edge on long-end direction here.

What can be said is static income. Carry+roll ranking shows US_30Y annualized carry at 6.005 and US_10Y at 5.28, both at relatively high levels, with US_10Y reliability corr=0.112 and long-only win rate 56% labeled as proven, while US_30Y is only marginal. For a medium-term ~3-week holding system, this means if yields trade sideways, the coupon and roll-down for the 10- and 30-year can produce returns, especially nominal carry is highest on the 30-year. But this is only a "tailwind," not a directional signal. If long-end yields resume the kind of 20-day upward moves seen recently, particularly the 30-year rising another ten-plus basis points, duration losses could easily wipe out that carry. Thus the long end currently looks like "high carry but high directional uncertainty," not something to be judged solely on carry.

3. Canada: directions for all maturities unpredictable, no directional judgement; the divergence versus the US merits continued attention

Canada 2-, 5-, 10-, and 30-year direction signals are all ≈ random walk, so their next-3-week directions are unpredictable and no directional judgement is offered. News lacks sufficiently direct domestic Canadian macro catalysts, so interpretation is mainly via North American relative pricing. The clearest fact is: Canadian yields are overall materially lower than US yields, and 60-day changes are significantly weaker than the US, indicating recent global upward pressure on rates has transmitted less to Canada.

On a static basis, Canadian long-end carry is not bad. CA_30Y annualized carry 4.95, CA_10Y 4.39, and both are labeled proven, with long-only win rates of 54% and 56% respectively. This means under a no-yield-move scenario, Canadian mid-to-long maturities offer some hold income. But again, this is not a directional forecast; if North American long ends rise led by the US, Canadian bonds will also be pressured, though not necessarily to the same extent as US Treasuries.

4. Curve shape: both US and Canada are steepening, but for different reasons

US 2s10s at +45bp and Canada 2s10s at +74bp are both in positive slope territory, indicating the deep inversion regime has clearly changed. US steepening this week is more a combination of "short-end pullback and long-end firmness," while over the past month it has been "the whole curve moving up but the long end stronger," essentially driven by sticky inflation, fiscal issues and term premium lifting nominal long ends. Canada’s steepening is milder and more like normalization from a lower rate level.

For a 3-week system, curve information implies two things. First, proven short-end upward direction in the US and unpredictable long-end direction means that if US data continue to support "higher rates for longer," the front end is more likely to re-accelerate upward rather than simply betting on a unilateral long-end outcome. Second, cross-border, Canada’s curve is steeper but directional evidence is weaker, meaning its trading value may come more from static carry and relatively lower volatility rather than directional conviction.

5. Credit spreads: marginal widening but sample length is too short, so use only as ancillary description

US_HY_OAS 20-day +9bp, US_IG_OAS 20-day +5bp, indicating slight risk repricing amid higher long-end yields. But because there is only 3.1 years of history for this measure, per methodology we can only describe it and cannot give it strong predictive weight. Its implication for rates markets is: if the subsequent combination is "high risk-free rates + still-narrow credit compensation", long-end government bonds may not automatically benefit from safe-haven flows and may instead continue to be dominated by supply and term-premium dynamics.

3. Risk Warnings

First, Fed communication risk remains high. News clearly shows notable division at this meeting and "Fed silence leaves markets flying blind." In such an environment, a single official’s comment can quickly change short-end pricing, especially for 2- and 5-year yields which have proven uptrends; volatility may be non-linear.

Second, inflation narratives could re-intensify. US Q2 inflation being "even without Energy" poor means you cannot attribute inflation simply to oil; Europe’s rebound is energy-driven. If energy and core pressures coexist, global long ends could be under pressure.

Third, high long-end carry is not a safety cushion. Current US 10- and 30-year and Canada 10- and 30-year carry are not low, but this is only expected returns assuming yields do not move. If yields continue to rise, especially when US 30-year is already in a high z-score range, duration losses can outpace carry accumulation.

Fourth, cross-market risks can amplify. The USD/JPY intervention warning signals exchange-rate policy could reverse global flows and rate volatility; at the same time, rising mortgage rates and news of housing repair friction show tighter financial conditions are transmitting to the real economy. If risk-asset adjustments intensify, rates and credit could exhibit non-linear interactions.

Fifth, currently directional judgments are limited to US 2-year and 5-year only. For US 10-year, 30-year and all Canadian tenors, direction is unpredictable and no directional call is made; any interpretation that long-end high yields and high carry equate to "must buy" or "must fall" goes beyond the supportable evidence.

This report is for research purposes and is not investment advice.