The 10-year yield backed away from its highest close since 2002, but the long end barely budged while near-term hike bets collapsed. Wednesday's minutes and a $39 billion reopening are the next tests.
Two very different messages are coming out of the Treasury curve at once. Traders have sharply reduced expectations that the Federal Reserve raises rates again this month, yet the 10-year note sits within a few basis points of a level not seen in nearly a quarter century.
The benchmark 10-year yield finished Monday at 5.31%, its highest close since 2002, before slipping about 4 basis points on Tuesday to roughly 5.27%. The 30-year bond eased to about 5.64% and the two-year note fell more than 3 basis points to near 4.80%. By early Wednesday, yields were climbing again, with the 10-year back near 5.31% ahead of the session's heavy calendar.
The striking shift has been in policy pricing. Futures now put the odds of an October rate increase at about 20.5%, down from roughly 51% a week ago. The odds of a hike by December, however, stand at 84.5%. The Fed raised rates in September, its first increase since July 2023, and the market is now debating timing rather than direction.
That split matters for how investors read the long end. In the span of a week, roughly 30 percentage points of October hike probability disappeared, and the 10-year still printed a 24-year closing high. A move that size in front-end expectations with so little relief further out points to forces beyond the next meeting: heavy supply, a rising term premium and persistent inflation worries.
Tuesday's $58 billion three-year note sale offered a glimpse of demand at these levels. The notes cleared at 4.932%, nearly 46 basis points above the prior sale's 4.474%. The bid-to-cover ratio of 2.62 came in below the previous auction's 2.72 and roughly in line with the recent average of 2.64. In other words, buyers showed up, but they did not chase.
Fed officials have kept the door open. Kansas City Fed President Jeffrey Schmid said the central bank still needs to lift its policy rate further to bring inflation down, even as higher long-term yields weigh on parts of the economy. San Francisco Fed President Mary Daly framed further increases as dependent on whether the forces behind inflation fade or persist. Governor Christopher Waller, Minneapolis Fed President Neel Kashkari and St. Louis Fed President Alberto Musalem are all scheduled to speak Wednesday.
The pressure is visible in housing. The average 30-year fixed mortgage rate climbed to 7.61% on Monday, another recent high, and homebuilder shares are trading near their lows for the year.
What to watch
The Treasury will reopen $39 billion of 10-year notes at 1 p.m. Eastern Wednesday, followed by a $22 billion 30-year reopening on Thursday. Minutes from the – meeting arrive at 2 p.m. The key detail will be how many participants saw further increases as likely. A large group would support the December pricing; a thin one would argue that the long end is trading supply and term premium, not the Fed. September consumer prices on and the – policy meeting follow.