• Long-dated Treasuries rally as investors position for a Fed pause in October and a possible hike in December.
  • Wednesday’s CPI report is the next major catalyst; forecasts point to headline inflation accelerating to 3.6%-3.7% year over year.
  • Market pricing shows only a 19% chance of an October hike, but a December move remains fully priced in.

Investors are favoring longer-term Treasuries, pushing long-term yields lower faster than short-term rates, according to BMO (BMO). The move comes ahead of Wednesday’s inflation report and the Federal Reserve’s upcoming policy meeting, with markets increasingly betting that policymakers will hold rates steady in October before delivering a 25-basis-point hike in December.

The rally in long-dated debt narrowed the gap between long- and short-term yields. This morning, the 10-year Treasury yield stood at approximately 5.202%, down more than four basis points, while the 30-year yield was at 5.552%, also down more than four basis points. The two-year yield, which is more sensitive to near-term Fed policy, was approximately 4.80%, up slightly. Prices and yields move in opposite directions.

Fragile Prospects

An October pause is now the dominant expectation. LSEG (LSEG.L) pricing cited in October 13 reporting showed only about a 19% probability of a hike at the next meeting, which is scheduled for October 27-28. The Fed’s official calendar also lists a December 8-9 meeting, where a quarter-point increase is fully priced in, according to Bloomberg. More recent reporting still showed three hikes priced over the next 12 months, though falling oil prices have encouraged traders to trim their tightening bets.

Wednesday’s September CPI report is the immediate catalyst. Forecasts differ: the Wall Street Journal poll cited by Dow Jones expects headline inflation of 3.6% year over year, while CNBC reports a 3.7% consensus, versus August’s 3.4%. CNBC puts expected core inflation, excluding food and energy, at 2.5%, compared with 2.4% previously. These are forecasts; the report has not yet been released.

Recent Fed commentary suggests a gradual tightening path, reducing expectations of an October rate increase. However, an expected October pause should not be interpreted as uniformly dovish. Recent coverage describes a more hawkish tone following September’s rate increase, the first since 2023. Fed Governor Christopher Waller attributed the recent yield increase to stronger real growth, AI investment, and debt concerns, while describing inflation expectations as “well anchored.”

The Longer Backdrop

Borrowing costs remain historically elevated. European-session reporting put the 10-year yield near 5.189% and the 30-year near 5.547%, below last week’s respective 24-year highs of 5.365% and 5.733%. The pullback provides some relief, but leaves yields high. DZ Bank estimated the 10-year Treasury term premium—the extra compensation for holding longer-term debt—at 91 basis points, its highest since 2014.

Geopolitics is influencing the inflation outlook through energy supply. CNBC linked Tuesday’s oil decline to prospects for additional Russian diesel reaching global markets following a U.S.-brokered Russia–Ukraine “energy ceasefire.” Separately, Bloomberg’s October 9 coverage identified the Iran war and elevated energy costs as drivers of the preceding global bond selloff.

Fiscal concerns also remain relevant: worries about expanding government deficits contributed to the recent selling of long-term bonds. Consequently, a slower Fed tightening path alone may not be enough to produce a sustained decline in long-term yields.

What to Watch

The CPI result—and particularly how it compares with expectations—will test the rally. A firmer-than-expected report could revive tightening expectations and push yields higher. Bannockburn strategist Marc Chandler specifically warned that a firm CPI reading could lift expectations for Fed policy and long-term rates. Macquarie (MQG.AX) strategist Thierry Wizman argued that the expected acceleration was unlikely to prompt an increase at the October meeting.

Further catalysts arrive quickly: producer-price inflation and retail sales are scheduled for Thursday, providing additional evidence on inflation pressures and demand. Eurozone government bonds also rallied Tuesday, with falling oil prices supporting lower yields—a parallel move showing that the reassessment extends beyond the United States.

The December meeting includes updated economic projections, giving investors another opportunity to compare market expectations with policymakers’ projected path.

Update: This article was updated to clarify that the October FOMC meeting is scheduled for October 27-28.