How to think about interest rates now

It “feels” like there is a lot of fear around holding U.S. government bonds and the threat of rising interest rates. There appear to be short-term inflationary pressures and fears of high levels of government debt. At the same time, there is increasing pressure from the administration to aggressively utilize both fiscal and monetary policy to stimulate the economy, including high government spending and calls for the Fed to lower interest rates.

The fear of rising interest rates has been the only market constant in my career; every year, the same fear, just a slightly different story. But maybe a stopped clock is right twice a day.

Forces behind the higher for longer camp

• High levels of government debt and continued aggressive fiscal policy (high spending, low taxes).
• Weak dollar – Makes imports more expensive to U.S. buyers.
• Tariffs – Make imports more expensive to U.S. buyers.
• Input prices – Prices of copper, aluminum, and HRC steel (hot rolled coil), have been rising rapidly.
• Energy – While oil and gas are arguably oversupplied, they are being held up recently by weather and geopolitics.
• Booming economy – Onshoring, energy and electrification buildout, military spending, data centers, chip factories, high asset prices and the real wealth effect.
• Supply shortages – Many basic materials are in short supply for a global industrial buildout. After decades of low commodity prices, the mining infrastructure is behind the curve for supply growth.

Sounds like a perfect storm for unexpected inflation.

The Fed

• Replacing Jerome Powell only removes one of 12 votes for monetary policy.
• The Fed does not control borrowing rates per se, they more directly control the savings rate and the rate at which banks borrow from the Fed. Lenders still choose how much to lend and at what rate. Furthermore, long-term borrowing costs are tied to prices of long-dated treasury bonds, not the Fed Funds Rate.

The Fed is highly unlikely to lower interest rates further given the developments stated above.

Long-dated interest rates: The rates that influence borrowing costs

• All of what is mentioned above is well-known information to major buyers of government bonds.
• Longer term (5- to 20-year) government bonds have not lost money, thus interest rates have stayed stable through this news.
• The Fed had/is doing some sort of quantitative easing – buying bonds in the open market to keep long dated interest rates low.
• U.S. interest rates remain higher than other nations that compete for sovereign bond demand. This reflects a healthy risk premium for U.S. treasury debt already built into interest rates. Now, are we a worse credit than Italy?

As of January 26, 2026, the current 10-year sovereign bond yields for major nations are as follows:  

Source: Bloomberg. Data as of January 26, 2026.

• Demand for treasury bonds is at a nadir, given the world’s current appetite for equities, which could mean pent up bond buying power in the event of a stock correction.
• On a side note, sentiment to hold U.S. treasury bonds is probably at an all-time low. Below is the evolution of how disliked U.S. treasury bonds have become:
  Source: https://www.linkedin.com/posts/jonathanbaird88_investing-markets-bonds-activity-7413230573953069072-GzdA/

• Experts only concept: Often, when the Fed raises the Fed funds rate, longer dated treasury yields actually fall. Here’s why:
  • Long-dated interest rates falling while the Federal Reserve is actively raising short-term interest rates (tightening) is a recognized market phenomenon, often resulting in an inverted yield curve. This occurs when investors believe that the Fed’s aggressive tightening will eventually hurt the economy, leading to lower inflation or a future recession.

Why this happens 

• Market anticipation: The bond market is forward-looking. If investors believe the Fed will over-tighten, they will buy long-dated bonds (dropping their yields) in anticipation of a future recession and necessary rate cuts.
• Safe-haven flow: When tightening creates instability (like in 2006 or 2022), investors flee to the safety of long-term US Treasuries, driving up prices and reducing yields.
• Anchored inflation expectations: If the market trusts the Fed to keep inflation under control, they won’t demand higher inflation premiums on long-term bonds.

The takeaway

1. The Fed is unlikely to lower the Fed funds rate anytime soon, and if input prices continue to rise, their next move might actually be to raise the Fed Funds Rate.
2. Long-dated rates which influence borrowing costs for long-term purchases – mortgages, car loans, credit cards, student loans, private equity, business loans – likely already reflect U.S. Treasury bond fears.
3. The shape of the yield curve can change due to investor expectations, demand for bonds, and term premia. Often, when the Fed raises the Fed Funds Rate, longer dated borrowing costs can fall.