Bond yields fall from 24-year highs as Wall Street awaits Wednesday’s inflation data

U.S. Treasury yields fell on Tuesday, retreating from 24-year highs as investors waited for September inflation data that could shape the Federal Reserve’s next interest-rate decision.

The yield on the benchmark 10-year Treasury note dropped 5 basis points to 5.193%, while the 30-year yield fell 4.1 basis points to 5.557%, according to Tradeweb figures cited by The Wall Street Journal. Both sit below the 24-year highs of 5.365% and 5.733% reached last week. Eurozone yields fell as well, helped by lower oil prices and a pullback in artificial-intelligence stocks: Germany’s 10-year Bund yield slipped 3.5 basis points to 3.439%, while France’s 10-year OAT retreated 7.2 basis points to 4.828%.

Attention now turns to the consumer-price index for September, due Wednesday morning. A Wall Street Journal poll of analysts expects headline CPI to show prices rising 3.6% from a year earlier, up from August’s 3.4%.

Markets price a pause at the Oct. 28 meeting

Traders largely expect the Fed to keep its benchmark rate at the current 3.75% to 4.00% range when policymakers meet on Oct. 28. Markets put the chance of a rate increase at that meeting at just 19%, according to LSEG data cited by the Journal, while a Bank of America survey of global fund managers published Tuesday found 76% expect the Fed to hold. Over the next 12 months, however, markets are still pricing in a total of three rate increases.

Recent comments from Fed officials suggest borrowing costs will move higher over time. According to the Journal’s reporting, Governor Christopher Waller has argued further hikes are likely, though he has stressed flexibility on timing, while Cleveland Fed President Beth Hammack has called for a faster move toward tighter settings.

Waller: inflation expectations “well anchored”

Speaking at a Bloomberg event in Mumbai on Tuesday, Waller said the recent jump in bond yields reflects stronger economic growth rather than rising inflation expectations, which he said remain “well anchored,” according to Reuters. He said investment in artificial intelligence, including data-center construction, is supporting demand and could continue to do so for two or three more years, while meaningful productivity gains are still years away.

Waller also pointed to a loss of safe-haven status for U.S. government debt over the past two years, saying academic research suggests that shift alone could be adding 50 to 70 basis points to yields. Higher market yields, he added, are “doing a little bit of the [Fed’s] work” of tightening financial conditions, MarketWatch reported.

Not every analyst is convinced Wednesday’s report will move the needle for the October meeting. “We do not believe that the report will sway the Fed into hiking later this month,” Thierry Wizman, global FX and rates strategist at Macquarie Group, said in a note cited by the Journal.

Reporting based on coverage by The Wall Street Journal, Reuters and MarketWatch.