Why Borrowing Costs Are Still High Even Though a Fed Hike Looks Unlikely
Traders now see only a 19% chance the Federal Reserve will raise rates on Oct. 28, down from as much as 70%. U.S. and European borrowing costs rose on Oct. 9 but stayed below recent highs. Wall Street Journal Think of a bond yield as the price for borrowing money for a long time.
The Journal's 'Week Ahead for FX, Bonds: U.S. Inflation Data in Focus' says the next U.S. inflation report will drive bonds and currencies. Short-term rate bets have dropped fast. Long-term yields have not.
Markets have swung both ways. U.S. and eurozone yields fell on Oct. 6, then rose on Oct. 9 without hitting the recent highs. Wall Street Journal
The earlier rise came from strong economic data, higher energy prices and more bond sales to pay for AI projects. Wall Street Journal That pushed up regular yields, before adjusting for inflation, and made longer bonds less popular when growth looked strong.
The drop briefly pushed the 10-year U.S. Treasury above 5% for only the second time. Wall Street Journal Yields adjusted for inflation stayed high, at 2.87% on Oct. 8. FRED
That 10-year number is an estimate, not from one exact bond. The Fed's H.15 report gives a 10-year yield even when no bond has exactly 10 years left. Federal Reserve Traders use it to compare bonds and to read expected inflation from inflation-protected bonds.
Forecasters already expected higher for longer. Bank of America predicted three 0.25-point Fed rises in 2026, described as the most hawkish call in a survey reported July 9, 2026. Reuters In the same survey, it put the two-year yield at 4.50% at end-2026.
The broader context here is a split. The market has mostly ruled out Oct. 28. Long-term borrowing still faces extra bond supply and inflation risk, with inflation-adjusted yields doing the adjusting as regular yields react to growth and energy.
In my view, the inflation report now matters more than usual for bonds and currencies. A cool report would back the 19% odds and likely keep yields below 5%. A hot report would bring hike bets back fast and test what extra return investors want for long bonds. Either way, market swings come from rate moves, not credit worries.
