Analysis
From 5.33% to 5.10% in Two Days: How the Treasury Market Changed Its Mind About the Fed
The 10-year Treasury yield spiked to 5.33% after Wednesday's CPI report, closed Thursday at 5.09%, its lowest since September 22, and ended the week at 5.10%, down from 5.24%. The long-bond ETF TLT gained 2.65% in five sessions and futures now put the chance of an October 28 rate hike at 17%.
The bond market spent last week arguing with itself and, by Friday, had settled on an answer: the Fed is probably not raising rates on October 28, but it probably is in December. The 10-year Treasury yield started the week at 5.24%, touched 5.33% in the minutes after Wednesday's consumer price report showed inflation at 3.7%, and then fell for two days, closing Thursday at 5.09%, its lowest since September 22, and Friday at 5.10%. The 30-year yield went from 5.60% to 5.44%. The iShares 20+ Year Treasury Bond ETF (TLT) rose from $77.98 to $80.05, a gain of 2.65% in a week in which the Nasdaq lost 4.48%.
The reversal came from reading the details. Wednesday's CPI was hotter than forecast in the headline, but more than half of the monthly increase was gasoline. Thursday's producer price report showed a 1.3% monthly jump, the largest since 2022, with gasoline up 20.3%, and retail sales up 0.8% of which 71% came from petrol stations; strip out fuel and the consumer looked soft. Bond investors decided that an inflation shock made of oil is not the kind the Fed hikes into with the Nasdaq falling, and bought duration.
Futures moved the same way. The CME FedWatch probability of a quarter-point increase at the October 28 meeting went from about 22% at the start of the week to a peak above 50% on Wednesday afternoon, then back to 17% by Friday's close, from 28% on Thursday. The chance of a hike by the December 9 meeting is 89% and did not change. Chair Warsh, speaking in Bangkok on Friday, declined to say what the committee would do and the blackout period began on Saturday, so the next official word is the statement itself.
Stocks noticed the yields but not enough. Falling long rates are usually good for the growth stocks that fell hardest, and the fact that the Nasdaq lost 2.15% on Friday with the 10-year at 5.10% rather than 5.33% says the selling was about AI balance sheets and crowded positions, not about the discount rate. The sectors that did rise, utilities, staples and energy, are the ones that compete with bond yields for income investors, and they got the benefit.
This week the Treasury sells $13 billion of 20-year bonds on Wednesday afternoon, which will test demand at the long end after the rally, and the flash PMIs on Friday will update the growth picture. The releases that matter for the Fed come the week after: third-quarter GDP and September PCE inflation on October 29, the morning after the decision. A 10-year at 5.10% has priced one hike and a pause; a move back toward 5.33% before the meeting would mean it has started pricing two.