The Indicators Others May Not Be Watching:

Most bond market conversations in North America begin in a familiar place: inflation in the U.S. and Canada, and what it implies for the U.S. Federal Reserve (the “Fed”) and the Bank of Canada (the “BoC”).

That focus is warranted. Inflation shapes policy. Policy anchors yield curves. Yield curves, in turn, influence asset allocation decisions across portfolios.

Today, markets expect the Fed to cut rates twice this year, while the BoC is anticipated to hold steady. Pandemic-related supply shocks have largely faded. Prior monetary stimulus continues to support a cyclical recovery. The prevailing assumption is that inflation will continue its gradual downward trajectory over the coming months.

But there are no guarantees.

From our perspective on the bond desk, the central issue is not the base case itself. It is the fragility of the base case. What matters most is how quickly expectations can adjust if the underlying data begins to challenge consensus.

Inflation and policy reversal in Australia

Recent developments in Australia provide a timely case study in how swiftly expectations can reverse. In the fourth quarter of 2025, core inflation picked up to 3.4% , the fastest pace in more than a year. That persistence prompted a shift in tone and action from policymakers: the Reserve Bank of Australia (RBA) hiked interest rates by 0.25% to 3.85% on February 2nd.

Only months earlier, in October 2025, we observed that markets were pricing further rate cuts from the RBA in 2026. That narrative shifted decisively. Year-end 2026 expectations are now approximately 125 basis points higher than last fall.

In a developed market environment where most central banks are guiding toward easing monetary policy, the RBA, alongside the Bank of Japan, has moved in the opposite direction. We acknowledge this result as a meaningful divergence in global policy paths.

That divergence is not theoretical. It is being expressed directly in bond yields.

The Australian Yield Curve is Reshaping

The effects of this sudden reversal by the RBA have sent ripples across Australian bond markets. Since October, Australian 10-year government bond yields have risen roughly 75 basis points and almost reached 4.90 percent.

As expectations for additional tightening, particularly around the February and May meetings, became more firmly embedded in pricing, upward pressure on the long end of the curve intensified.

In our view, the repricing was driven by a combination of:

• Stubbornly elevated core inflation

• A stronger-than-expected labour market

• A central bank intent on reinforcing its credibility and commitment to price stability

What it May Mean for North America

We believe that the Australian experience underscores a risk that may not be fully reflected in North American bond markets. The Fed and BoC are widely anticipated to remain on an expansionary trajectory, assuming continued disinflation, an orderly easing cycle and stable, or gradually declining, long-term yields.

However, if inflation were to reaccelerate in the medium term, even modestly, and central banks signal renewed tightening to preserve credibility, we anticipate a very real possibility of rapid[KB1.1][CR1.2] yield curve upward movement. In that environment, long-end yields could move meaningfully higher.

For advisors, the implication is not alarmism. It is preparedness. Portfolios constructed solely around a smooth rate-cut narrative may be exposed to volatility if inflation proves more persistent than anticipated.

From our vantage point, the objective is not to predict a policy reversal. It is to remain attentive to the undercurrents: inflation persistence beneath headline data, labour market resilience, and shifts in central bank language around credibility and control.