The 10-year yield slipped to about 5.20% a day before September inflation data. Investors now see an October increase as unlikely, while event-contract traders price a December move at about three in four.
Bond buyers returned on Tuesday as the cash Treasury market reopened after Monday's holiday. They did not change the Federal Reserve's direction of travel, only its timing.
The 10-year Treasury yield fell about 4 basis points to near 5.20% in early trading. The 2-year yield, which tracks expectations for Fed policy, eased about 3 basis points to near 4.77%, and the 30-year yield dropped about 4 basis points to roughly 5.56%.
Last week the 10-year touched about 5.36% during trading, its highest level in roughly 24 years. Its highest close of the month, by Treasury's count, was 5.31% on Oct. 5. It ended Friday at 5.24%.
October Off The Table, December Not
CME Group's FedWatch tool puts the odds of a hold at the Oct. 27 to 28 meeting near 81%. At the end of September they stood at about 51%. On Kalshi, a contract paying out on a quarter-point October increase last traded at 17 cents early Tuesday. A December hike traded near 74 cents.
That split matches what policymakers have been saying. In a speech on Oct. 8, Fed Governor Christopher Waller said: "If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal. But there is some flexibility." In that speech he noted that futures priced an 85% chance of at least one increase by the end of the December meeting. Speaking early Tuesday at an economic forum in New Delhi, Mr. Waller focused on artificial intelligence and did not address the near-term rate outlook, according to initial reports of his remarks.
Policy has been tightened once already this cycle: September's increase took the target range to 3.75% to 4%.
The Test On Wednesday
Wednesday's 8:30 a.m. Eastern release of September consumer prices is the next hurdle. Economists surveyed by FactSet expect headline prices to rise 0.5% from August and 3.6% from a year earlier, up from 3.4% in August. They see the core measure, which excludes food and energy, rising 0.2% on the month.
A headline figure near forecast would mostly reflect energy. Brent crude is trading above $100, and diesel prices are far above year-ago levels. A soft core number would support the case for waiting until December. A hot one would bring October back into play.
Who Is Buying
The rally came as stocks tied to artificial intelligence sold off in Asia. BlackRock's research arm cut its view on U.S. stocks to neutral on Monday and turned positive on short-term Treasuries, a preference for the front of the curve rather than long bonds. The IMF, for its part, warned in its financial stability report that government bond yields could rise in a disorderly way as debt piles grow.
Charu Chanana, chief investment strategist at Saxo, called the move "a tactical rally rather than a lasting turnaround." She said "sticky inflation, elevated oil prices and heavy government borrowing remain obstacles to a sustained bond recovery."
Market Implications
One reading is that the bond market has found a ceiling. Yields above 5.3% drew buyers once growth worries surfaced, and an October pause would give inflation another month to cool.
A second reading is that the pullback is positioning ahead of data. The Fed is still signaling more tightening, oil remains high and the U.S. keeps borrowing heavily. On that view, a firm inflation report would send yields back toward last week's highs.
What To Watch
Richmond Fed President Tom Barkin and Boston Fed President Susan Collins also speak Tuesday. The Treasury's September budget statement is due at 2 p.m. After Wednesday's inflation report, producer prices and retail sales follow Thursday.