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Join CFC expert John Suter, vice president of economic research, as he looks at current rising bond yields, likely interest-rate trends and how CFC borrowers have coped with higher rates in the past.
Contact the Economic & Market Watch team at economicresearch@nrucfc.coop.
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Listen to the latest economic insights from CFC experts John Suter, Sam Kem, and Antony Davies.
Hello, and welcome to the 200th episode of Economic and Market Watch. This is the podcast for the week of June 1, 2026. This is John Suter of CFC. The rural electric industry, similar to the automotive industry and investor-owned utilities, is a capital-intensive industry which relies heavily on fixed-rate debt to finance long lived assets. In finance, we call this a match-funded strategy. In order to build a fixed borrowing rate, the starting point is the US Treasury yield, which is market based and ranges from one to thirty years.
John Suter:And guess what? Unfortunately, they are on the rise.
John Suter:What is happening is, the US is undergoing a structural change towards higher average interest rates. With bond prices sliding, the yield on the ten-year US Treasury note, a key benchmark for mortgage rates and other borrowing costs, reached a high of 4.67 as of May 19 this year.
John Suter:When observing the ten-year Treasury rate over the last 54 years, the last 10 years are the anomaly in terms of low rates. Rates only occasionally dropped below 4% between 1962 and 2008. Since 2008, rates have been continuously below 4% until late 2022 -- until inflation ramped up and the Fed started hiking the overnight rate 11 times to slow it down.
John Suter:The main driver of this recent bond sell-off is the US conflict with Iran, which has paralyzed shipping through the Strait of Hormuz and kept oil prices 60% above where they were before the war started. Even if the Strait reopens soon, undoing the upheaval will take months. The ramifications of such a long-lasting shock to the system cannot be easily undone, meaning higher prices and inflation for the near term.
John Suter:This situation is different from 2021, when demand for treasuries remained strong, keeping yields near historic lows, even as inflation shot higher. This non-reaction was because investors have become accustomed to an era of ultra-low interest rates that followed the 2008-2009 global financial crisis. However, this time around, market conditions before us are more uncertain and challenging, and hence, investors are dogged by a different experience. Macroeconomic theory would suggest that the Fed wouldn't necessarily have to raise rates in response to a jump in energy prices since those prices are volatile and could reverse quickly. However, investors are wary about dismissing inflation as transitory, especially when higher, future inflation erodes real bond yields.
John Suter:Furthermore, it's a global market, and the Iran conflict isn't the only factor pushing yields higher. Yields on long-term bonds in Japan surged due in part to concerns that the government there will borrow and spend more to blunt the impact of high energy costs. Yields on UK bonds also climbed in response to the growing threat of leadership challenge to the prime minister. Bond investors are worried that a new leader could pursue more expansive fiscal policies.
John Suter:And you might wonder, so what? Why do I bring this up?
John Suter:When bond yields rise sharply overseas, US yields typically also climb to reflect the fact that investors can buy higher yielding bonds elsewhere. Portfolio managers operate on a very competitive basis. Every basis point counts and as of late, returns for stocks and bonds have been better outside of the US.
John Suter:Maybe even more important, the emergence of new fiscal concerns abroad has also revived perennial anxieties that the world is becoming swamped with bonds. Thanks largely to massive borrowing by the US government, which is fast approaching $40 trillion in public debt. When governments are frequently in the markets raising money, this puts even more pressure on interest rates and crowds out businesses and consumers.
John Suter:Even though rising bond yields look to continue, there is a silver lining. Since the start of the Iran conflict, one argument for holding on to current treasury bonds has been the increase in energy prices and borrowing costs would lead to demand destruction, with consumers cutting back on spending and businesses following suit. In other words, a slowing of the economy.
John Suter:In fact, economists estimate that if oil stays above a $100 a barrel, real GDP could fall by 0.4 percentage points and inflation could rise by 1.2 percentage points on an annual basis. It's kind of a catch-22 under this scenario for the Federal Reserve because they really can't cut rates further if inflation continues to rise. (Like now, inflation is trending the wrong way.) But they cannot raise the overnight rate aggressively to combat inflation because that will slow real GDP growth even further.
John Suter:So far, this predicament has not hurt economic growth in as much the US economy has been quite resilient and that recent data has been solid. For example, real GDP growth is expected to be close to 2.1% at the end of 2026, which is respectable. And US employers added 460,000 jobs this year with the unemployment rate holding steady at 4.3%. In short, more jobs, more spending, a stronger US economy. What does this mean for a CFC borrower?
John Suter:Well, first off, there's a wide range of opinion on what is considered a high ten-year Treasury yield. I would throw out that once the ten-year Treasury yield crosses the 5% threshold, fixed-rate borrowing becomes costly. Remember that a fixed loan rate is the combination of the term Treasury yield plus CFC's credit spread as a single A issuer, along with our business cost adders. One has to go all the way back to the early 2000s when the ten-year Treasury yield exceeded the 5% level. What did member borrowers do back then?
John Suter:Many opted to borrow variable rate instead of fixed. There is nothing wrong with borrowing variable, but sometimes just a matter of preference. However, one must keep in mind that borrowing variable means the cooperative has taken on interest-rate risk because CFC can adjust that rate on a monthly basis if necessary. The strategy back then was to borrow variable until long-term fixed rates became more attractive cost wise, essentially buying time in a challenging term interest rate environment.
John Suter:Of course, if management (or the board of directors) is opposed to variable rate borrowing, the other option is to simply shorten the tenure of the fixed-rate loan.
John Suter:For example, a cooperative could choose a 6-year fixed rate loan instead of a more expensive 30-year fixed rate. In fact, 73% of fixed rate loan advances this past fiscal year were locked in for six years or less in term. The rate is still fixed, but maybe not for as long as management (or the cooperative board) would have preferred. In this case, a member simply needs to manage the term of the rate resets so as not to have a year where a high percentage of fixed rate loans are repricing at the same time, otherwise known as rollover risk. For member borrowers that prefer only fixed loan rates, powerful economic forces are acting as a serious tailwind for longer dated Treasury yields, increasing the probability of an enduring period of higher rates.
John Suter:In simpler terms, buying time and waiting for lower term borrowing rates may not happen, or when it does, it may be a long wait. As such, borrowing strategies may have to be adjusted to reflect the reality of the current trend.
John Suter:That's it for today, but before I go, this podcast is available on many podcast apps, including Apple Podcasts, Spotify, and others. If you don't already subscribe, please subscribe, rate us, and leave a review. As always, we thank you for listening.
John Suter:Be sure to download the Economic and Market Watch dashboard and intelligence brief. We'll talk to you soon.