'Fiscal Dominance' and the Long-Bond Revolt: Why Market Rates Refuse to Fall

Published Thursday, September 10, 2026 · Rates, market figures and outlooks in this article reflect its publication date and may differ today. Ask us for the latest picture. Translated from the Korean original.

Global financial markets have recently been hit by a series of separate macro shocks all at once, including an all-out tariff war, surging oil prices and geopolitical conflict. But looking at the essence of all these developments, they show that the era in which monetary policy (central banks) controlled the market has ended, and we have fully entered a phase of "fiscal dominance," in which government finances and trade policy determine market interest rates.

Key Points

• Monetary policy neutralized: Regardless of central banks' willingness to cut policy rates, fiscal and trade policies—massive government debt financing, higher defence spending and retaliatory tariffs—have taken the lead in forcibly pushing up real market rates.
• A structurally higher neutral rate (R): As the era of artificially low rates ends and inflation volatility and sovereign debt risk become a permanent feature, the "baseline cost of capital (term premium)" demanded by market participants has itself structurally levelled up.
• Events converging in one direction: A mechanism has become entrenched in which very different variables—rising oil prices (commodity inflation), retaliatory tariffs (import inflation) and yen volatility (tightening global liquidity)—all lead, without exception, to a single conclusion: long-term bond yields that resist falling.
• The Bank of Canada's (BoC) structural dilemma: Even under pressure to cut rates to respond to a domestic downturn, the BoC faces a monetary policy checkmate: if the rate gap widens because of U.S. fiscal expansion and high rates, it must accept a collapsing exchange rate and surging import prices.

What It Means

The trend the bond market has recently shown is not just a "rate rebound driven by short-term negatives," but a paradigm shift (regime shift) in the global interest rate system. The old formula—"when the economy slows, the central bank will supply liquidity and bring long-term rates down"—no longer holds in the current phase dominated by fiscal deficits and trade barriers.

Ultimately, the fact that the Government of Canada 5-year bond yield (GoC 5Y) and fixed mortgage rates are holding at high levels should be interpreted not as a temporary fluctuation in individual indicators, but as part of a process in which the global cost of capital is finding a new standard (New Normal). When looking at the macro economy going forward, rather than focusing only on what central banks say, we need to watch the structural context of how the "fiscal power" created by national debt and trade disputes is firmly propping up the floor under long-term market rates.