The Takeaway

The outlook for interest rates in 2026 has shifted sharply—and not in the direction markets had hoped for. Investors began the year expecting the U.S. Federal Reserve to cut rates, but the Iran conflict has pushed inflation—and inflation expectations—higher.

Inflation has indeed risen.

The Consumer Price Index shows annual inflation at 4.2% in May, a three year high, with a 0.5% monthly increase driven largely by energy prices. The Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, shows 3.3% annual inflation and a 0.2% monthly rise in April. May data releases on June 25.

With inflation elevated and the labor market now strengthening—employers added 172,000 jobs in May, far above expectations—the Fed has little justification to ease policy. In fact, markets are leaning slightly toward a rate hike rather than a cut.

As for inflation easing, even an immediate end to the war wouldn’t quickly undo the damage. Elevated prices may linger longer than markets would like.

Reflecting this new reality, the Fed announced at its June 17 meeting that it is keeping its benchmark fed funds rate unchanged at a target range of 3.5% to 3.75% and hinted at a possible rate hike later in the year.

CoBank customers have largely adjusted to a reality that looks very different from what many expected just a few months earlier. The initial shellshock of not seeing lower rates anytime soon has given way to acceptance.

Today, the market is pricing in the possibility that the next meaningful move could be a rate hike—not a cut. That shift has prompted many borrowers to rethink their approach to interest rate risk. Instead of waiting for clarity, customers are increasingly hedging amid a highly uncertain interest-rate outlook.

The underlying principle of derivatives holds truer than ever: We don’t know the future; therefore, we hedge.

Back in April, the primary lending market was stuck in a cautious, yellow light mood. Two months later, the light is green. Markets have thawed after the Iran conflict’s initial inflation shock, and, with June through mid August typically a prime issuance window, it’s shaping up to be a busy summer before activity slows as we get to Labor Day.

Where borrowers go depends on their needs. Commercial banks—healthy and flush with deposits—are aggressive in the one to two year space. Companies needing size and longer terms, especially those tied to the data center buildout and its massive power financing demands, are heading to the bond market. The Farm Credit System continues to serve the middle tenors.

With rate cuts priced out, companies that waited for cheaper money are issuing now, rather than risking higher rates later. Spreads are stable to declining, and repricing is back.

In the secondary loan market, one theme stands out: rating averages no longer tell the whole story. Investors are choosing industries, and their margin differences are striking.

BB rated loans average SOFR plus about +250 basis points. Chemical sector loans sit ~50 bps wider, and Building Products sector loans—hit by housing slowdown fears—spiked to +332 in April before recovering to +254. Sector’s outperforming include Gas Utilities and Beverages.

The pattern is even sharper in single B territory: Building Products loans still average +841, down from nearly +1,500 during spring volatility. The clear winner is Electric Utilities, pricing +320, about 100 bps below the single B average of +432 as AI driven power demand boosts appetite for generation exposure.

The takeaway: Look past the rating. Industry matters.

Mother Nature—farmers’ perennial frenemy—has been the dominant force in the U.S. grain market this season, and it shows. Planting season generally progressed well, but extremes told the real story: The eastern Corn Belt faced excessive moisture, while the west battled severe drought, cutting yield potential.

With cash corn hovering near $4 per bushel—about a 10% recent drop—the setbacks sting as input costs climbed from roughly 16% upward of 40% on farm budgets. Diesel prices, pushed higher by geopolitical tensions, added more pressure.

Soybeans saw a brief lift from new renewable volume obligation rules boosting soybean oil demand, but prices have since softened. Early wheat harvests in Oklahoma and southern Kansas show lower yields, pushing local prices higher and leaving U.S. wheat uncompetitive globally.

The biggest emerging concern is fertilizer for the 2027 crop. As of publication date, the Strait of Hormuz appears ready to reopen, based on the memorandum of understanding signed by the U.S. and Iran. But high global prices are expected to ease only after 12-18 months, once normal movement resumes. Committing to purchases early feels risky, but delaying raises supply chain challenges (e.g., Will the fertilizer arrive in time?). Even with strong U.S. production, producers are exporting to capture higher margins abroad, keeping domestic prices elevated.

Recent CoBank capital markets activity

Aurora Cooperative Elevator Company

$310M credit facilities

Administrative agent, lead arranger and bookrunner

Corteva Inc.

$1.25B credit facility

Administrative agent and sole bookrunner

POET Grain LLC

$500M credit facility

Administrative agent and issuing lender

Fiber-to-the-home operators across rural America are racing to build out underserved areas while government grant dollars are still flowing. But—while it’s not time to start worrying—a potential speed bump is emerging, and it’s coming from an unlikely source.

The AI data center boom has fueled fierce competition for fiber-optic cable—the same fiber rural builders need. Hyperscalers are locking up enormous, multiyear supply contracts with Corning, the 800-pound gorilla of domestic fiber.

Meta led off in January with a deal worth up to $6 billion. On June 8, Amazon followed with its own multibillion-dollar agreement. Corning has signaled that more hyperscaler commitments are still to come.

The result is a textbook supply-and-demand imbalance. Demand has surged so quickly that the supply chain simply hasn’t responded fast enough. And, depending on how it plays out, smaller operators could feel it on two fronts: availability and cost.

Fiber prices have jumped as much as 50% since January, with more increases expected. Optical gear from vendors like Ciena and Calix faces extended lead times for the same reason—much of it ending up inside hyperscaler data centers.

Rural operators may not be in crisis territory yet, but these are real supply chain headwinds that could begin to affect the timing of some fiber network buildouts.

Recent CoBank capital markets activity

Data center

$308M credit facility

Coordinating lead arranger

Data center

$2B credit facility

Coordinating lead arranger

Data center

$770M credit facilities

Coordinating lead arranger

Mergers among investor-owned electric utilities have surged over the past two years. The latest—NextEra Energy’s proposed merger with Dominion Energy—would create a new elephant in the room: the world’s largest regulated electric utility by market cap, serving roughly 10 million customers across customers across Florida, Virginia, North Carolina and South Carolina.

Rural electric cooperatives have been only minor players in utility M&A, given their member-focused, nonprofit model. But that may be changing. As investor-owned utilities evaluate alternatives to allocate capital, some may be considering divesting rural service areas that have lower return characteristics.

Earlier this year, Oregon Trail Electric Cooperative announced a $154 million deal to acquire Idaho Power’s entire Oregon service territory, adding ~20,000 customers and nearly doubling its footprint. Idaho Power cited shifting growth priorities and saw OTEC as a strong local fit.

If regulators approve the deal, it raises a bigger question: In today’s shifting utility landscape, is there opportunity for co-ops to more actively pursue investor-owned assets?

Recent CoBank capital markets activity

IP Darden Construction I, II, II, IV, LLC

$4.95B credit facilities

Coordinating lead arranger

Bay Runner Pipeline, LLC

$1.27B credit facility

Coordinating lead arranger

Rayburn Country Electric Cooperative, Inc.

$150M credit facility

Lead arranger, administrative agent and sole bookrunner

The information provided in this publication is for informational purposes only and is not to be used or considered as investment research, a proposal, or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Companies and transactions referenced in this publication are shown for illustrative purposes only, and the provision of such information is not a recommendation or endorsement in this context. Certain information contained in this publication has been obtained or derived from third-party sources, and such information is believed to be correct and reliable but has not been independently verified. While CoBank believes that factual statements in this publication, and any assumptions on which information in this publication is based, are in each case accurate, CoBank makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such statements or assumptions. Note that CoBank may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth in this publication. CoBank is under no obligation to ensure that such other reports are brought to your attention. Furthermore, the information may not be current due to, among other things, changes in the financial markets or economic environment, and CoBank has no obligation to update any such information contained in this publication. This publication is not intended to forecast or predict future events.