Canada's hike flattened its curve; the Fed's hold steepened America's

The stone-faced Bank of Canada building between glass towers in Ottawa, with the street in front — Bank of Canada building, Ottawa (May 2009) — representative archive photoPhoto: Wladyslaw / Wikimedia Commons · CC BY-SA 3.0 · resized · Source

Why it matters

The noise: the Fed held rates, so policy stayed loose. The signal: the US 2-year yield fell 2.5 basis points while the 10-year rose 4.3 basis points to 5.036% and the 30-year 5.8 basis points to 5.363%. The 2s10s spread widened from 25 to 32 basis points. In Canada the hike lifted the front end instead: the 2-year rose by as much as 7.2 basis points to its highest since August 2024, while the 10-year added only 2.4 basis points. Growth was not the binding constraint: the Fed called the economy solid and the BoC raised its growth estimates. Both banks decide again on the same day, 9 December.

Implications

On 28 October the Fed held at 3.75–4.00% by a 10–2 vote; Lisa Cook and Beth Hammack wanted a 25 basis point hike. In September the vote was 12–0.
The BoC raised its rate by 25 basis points to 2.50%, its first hike since July 2023. Swaps put the odds of another hike on 9 December at 45% and fully price a second hike by January.
Futures lifted the odds of a December Fed hike from 75% to 82% the same day; Bloomberg data show about 85%. Markets price the policy rate rising to about 4.7% by September 2027.

Noise

Because the Fed held rates, monetary policy stayed loose

Signal

The far end rose at the bank that held, the front end at the bank that hiked

Signal vs Noise ›

Map: Canada's hike flattened its curve; the Fed's hold steepened America's

The expected happened; the surprise came on the curve

Yesterday's report read 28–29 October as three distinct patterns: Ottawa hikes, Washington holds hawkishly, Frankfurt holds quietly. The first two legs played out. On 28 October the Bank of Canada raised its policy rate by 25 basis points to 2.50%. The same day, at 21:00 TRT, the Fed held the federal funds range at 3.75–4.00%. The ECB announces its decision on the afternoon of 29 October; this report does not include that outcome.

The news lies not in the decisions but in the opposite reactions of the two curves. In the US, the 2-year yield fell 2.5 basis points after the decision to 4.712%, while the 10-year rose 4.3 basis points to 5.036%. The 30-year climbed 5.8 basis points to 5.363%, and the 2s10s spread widened from 25 to 32 basis points. That is a steepening: investors are demanding more term premium — extra yield in return for the inflation and uncertainty risk of holding distant maturities. In Canada the picture was reversed. The 2-year yield rose by as much as 7.2 basis points to 3.441%, its highest since August 2024, before easing to 3.413%. The 10-year added only 2.4 basis points to 3.885%. Canada's curve flattened: the bank that hiked won credibility at the far end.

Which constraint bound

Yesterday we wrote that growth was the constraint holding both banks back. The decisions corrected that reading. The Fed statement said economic activity was expanding at a solid pace. Rallies says the earlier wording was upgraded to the stronger description; WealthManagement writes that the stronger wording was already in the previous statement, and the difference could not be verified. According to the statement, job gains matched labour force growth and the unemployment rate was little changed. So growth did not bind the Fed. What bound it was information and timing: the committee wrote that more data would help determine the appropriate stance. The decision came six days before the 3 November midterms; according to Yahoo Finance, Fed Chair Kevin Warsh said politics played no role.

In Canada the binding constraint was the persistence of inflation. The BoC says CPI has hovered around 3% since April and is expected to reach about 3.5% by year-end; the return to target has slipped to mid-2028. The bank put second-quarter growth at 3.3% and the third quarter at about 2%. According to The Logic, earlier estimates were 2.5% for the second quarter and 1.5% for the third. US tariffs will slow growth in the fourth quarter, but the bank did not see that brake as strong enough to stop the hike. Governor Tiff Macklem's rationale was pass-through: reducing the risk that high energy prices spread to other goods and services. The governing council said it had also discussed holding, but no vote count was published.

The vote: the hawkish minority has moved to the Board

Yesterday we wrote that the real information from the Fed would be the dissent count; talk in the market ran to as many as three dissents. The result was two, but the composition matters more than the number. Cleveland Fed President Beth Hammack again called for a hike, as she did in July. What was new was the first dissent from Lisa Cook, a governor on the Board in Washington. Neel Kashkari and Lorie Logan, who voted for a hike in July, sided with the majority this time. The hawkish minority has not shrunk; it has changed seats, moving from the regional banks to the Board.

That shift hardened December pricing. Futures cited by Rallies lifted the odds of a 9 December hike from 75% to 82% the same day; Bloomberg data cited by Yahoo Finance show about 85%, unchanged from the day before. Markets price the rate rising to about 4.7% by September 2027, which implies three more hikes. Warsh also announced that one of eight meetings in 2027 will be a strategy session without a rate vote, rising to two in 2028. Fewer decision days mean each meeting carries more information.

The channel to Türkiye: dollar yields at the far end

Turkish markets are closed on 29 October for Republic Day; the first measure of the impact will come on 30 October. The channel is not front-end dollar rates but the far end. A US 10-year yield holding above 5% raises the floor on the cost of dollar borrowing at extended maturities for emerging-market governments and companies. According to Yahoo Finance, the US 30-year mortgage rate is about 7.4%, and pending home sales in September fell to their lowest since 2001. This is how the price of distant maturities passes into the real economy.

Canada's path offers a different lesson. The bank that hiked early calmed the far end, and the Canadian dollar was almost flat at 1.4035. The bank that held protected the front end but lost the far end. If the ECB opts for a hold on 29 October, the next test is whether the same pressure on distant maturities appears in the euro area.

Probabilities

Scenarios

Scenario	Probability	Trigger	Market impact
H1Fed hikes in December, BoC holds	45%	PCE and growth data on 29 October come in strong and the Fed moves to 4.00–4.25% on 9 December; the BoC holds the same day, citing the fourth-quarter slowdown	The US–Canada rate gap widens, the front end of the US curve rises too and the steepening stops
H2Double hike in December	30%	Energy prices stay high, Canadian CPI approaches 3.5% and both banks hike by 25 basis points together on 9 December	Synchronised tightening in North America narrows global financing conditions
H3The Fed holds again	25%	PCE and jobs data weaken or oil falls markedly; the Fed holds in December as well	Front-end yields fall but the term premium stays high; the far end resists around 5%

Module A

Constraints Matrix

STRUCTURAL AVG 3.8 · TACTICAL AVG 2.3Structural constraints dominate: the outcome is set more by these limits than by the actors' preferences.

Hard structural constraintspersistent · beyond the actors' will

Persistence of energy-driven inflation
5/5
The BoC says CPI has hovered around 3% since April, is expected at about 3.5% by year-end, and the return to target has slipped to mid-2028; the Fed statement describes inflation as elevated.
US term premium · United States
4/5
The 10-year rose to 5.036% and the 30-year to 5.363%, and the 2s10s spread widened from 25 to 32 basis points; the far end is pricing the Fed's pause as inflation risk.
Hawkish bloc inside the Fed · United States
3/5
The vote went from 12–0 to 10–2; governor Cook joined Hammack. A December hold carries the risk of more dissents.
US tariffs and Canadian growth
3/5
The BoC expects a fourth-quarter slowdown because of new US tariffs, with 2026 growth at 1%; unemployment has been around 6.5% for months.

Tactical frictiontemporary · eases over time

Data crunch on 29 October days
3/5
US September PCE and third-quarter growth are due on 29 October; economists expect annualised growth of about 3.2%. The ECB decides the same day.
Housing market months
3/5
The 30-year mortgage rate is about 7.4% and September pending home sales were the lowest since 2001; as the far end rises, this channel tightens.
Midterm calendar weeks
2/5
The decision came six days before the 3 November midterms; Warsh says politics played no role, but the first post-election decision is on 9 December.
Source gap in December pricing weeks
1/5
One source puts the odds of a December hike at 82%, Bloomberg data at about 85%; the gap is small but adds volatility up to decision day.

Module B

Signal vs Noise

SIGNAL 50% · NOISE 50%

NOISE
Because the Fed held rates, monetary policy stayed loose
After the decision the US 10-year rose 4.3 basis points to 5.036% and the odds of a December hike rose from 75% to 82%; the market did not read the pause as easing.
Data: US 10-year yield ›Rallies.ai — Longer-dated US yields rise after Fed holds rates and raises economic assessment
SIGNAL
The far end rose at the bank that held, the front end at the bank that hiked
In the US the 2-year fell 2.5 basis points and the 30-year rose 5.8; in Canada the 2-year rose by as much as 7.2 basis points while the 10-year added only 2.4.
Data: US 30-year yield ›Rallies.ai — Canadian 2-year yield hits two-year high as Bank of Canada hikes interest rates
SIGNAL
The Fed's hawkish minority has moved to the Board
The vote was 10–2; alongside Hammack, governor Lisa Cook dissented for the first time. In September the vote was 12–0.
Federal Reserve — Federal Reserve issues FOMC statement, 28 October 2026
SIGNAL
Growth bound neither bank
The Fed described activity as solid; the BoC put second-quarter growth at 3.3% and the third quarter at about 2%, and hiked anyway.
Bank of Canada — Bank of Canada raises policy rate to 2.5%, 28 October 2026
NOISE
Canada's hike will strengthen the Canadian dollar
After the decision the Canadian dollar was at 1.4035 against the US dollar, a 0.1% move; the hike was largely priced in.
Rallies.ai — Canadian 2-year yield hits two-year high as Bank of Canada hikes interest rates
NOISE
The election calendar decided the Fed's move
Warsh said politics played no role and that it was not discussed during the two-day meeting. The decision came six days before the election and drew two dissents.
Yahoo Finance — Fed meeting live updates: Interest rates held steady in split vote

Module C

Asset-Class and Positioning Implications

Asset class	Exposure	Transmission channel	H1	H2	H3	Expected	Conviction	Horizon	What to watch
Sovereign debt	Extended-maturity US Treasuries	Term premium and December hike pricing	0	−	−−	−0.80	●●●	0–3 months	The 10-year against 5.04% and the 30-year against 5.40%
Sovereign debt	Front-end US Treasuries	The Fed's 9 December decision	−−	−−	++	−1.00	●●●	0–3 months	December hike odds against the 82–85% band
Sovereign debt	Front-end Canadian government bonds	The BoC's December decision and the CPI path	+	−−	0	−0.15	●●●	0–3 months	Swap-implied 45% odds of a December hike
FX	Canadian dollar	US–Canada rate differential	−	+	+	+0.10	●●●	0–3 months	USD/CAD relative to 1.4035
FX	Emerging-market currencies	Dollar yields at the far end and global financing conditions	−	−−	+	−0.80	●●●	3–12 months	The dollar index relative to 102
Credit	Emerging-market dollar credit	The US 10-year yield holding above 5%	−	−−	0	−1.05	●●●	3–12 months	Türkiye five-year CDS reaction at the 30 October open
Volatility	Rates volatility	Data density and the double decision day on 9 December	+	++	0	+1.05	●●●	0–3 months	Yield moves after the 29 October PCE and growth data

Second-order effects

And then what?

Starting point

Although the Fed held on 28 October, the US 10-year yield rose to 5.036% and the 30-year to 5.363%, and the 2s10s spread widened from 25 to 32 basis points; the market priced the pause as inflation risk.

1
Mortgageswithin weeks
Rising yields at the far end keep mortgage rates around 7.4%; pending home sales, which fell to their lowest since 2001 in September, stay weak and residential investment loses share of growth.
Watch: Weekly 30-year mortgage rate and October pending home sales
2
Dollar borrowingwithin weeks
Dollar yields holding above 5% at the far end raise the cost of extended-maturity dollar issuance for emerging-market governments and companies; issuers cut maturities or postpone deals.
Watch: Emerging-market dollar bond issuance volume and average maturity
3
External financingwithin months
In Türkiye, Eurobond and syndicated loan costs rise for the Treasury and companies; the external debt rollover ratio and CDS reflect the higher cost.
Watch: Türkiye five-year CDS and November Eurobond issuance terms

What breaks the chain

The chain breaks at the first step if a sharp weakening in the 29 October PCE and growth data, or a marked fall in oil, lowers the inflation premium at the far end and pulls the 10-year below 5%.

Triggers

Thresholds to watch

Indicator	Threshold	Today	What it means
US 10-year yield	> 5.04	5.05	A break above the roughly 5.04% peak reached during the press conference would show the Fed's pause has lifted the term premium durably
US 30-year yield	> 5.40	5.37	A clear move above the 30-year's 5.363% level of 28 October would show the steepening spreading to the far end and keeping mortgage rates elevated
US dollar broad index	> 102	121.32	If the index, near 102 before the decision, settles above that level, a December hike is making emerging-market financing more expensive through the dollar

Sources

Sourcing and verification rules: methodology · Report an error: contact

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