US Treasury Yields Tick Higher, but Post Weekly Decline

The US 10-year Treasury yield edged up to 5.12% on Friday, following an 11bps decline in the previous session, but remained down around 14bps for the week. Yields also stayed below the highs reached earlier this month, their highest levels since 2002. Investors continued to assess the Fed’s policy outlook, with comments from Chair Warsh at the IMF summit bolstering expectations that rates will remain unchanged this month. Warsh declined to signal whether another rate hike was under consideration, but said hotter-than-expected inflation had not altered his assessment of the US economy. Markets currently price in around an 85% probability of a rate hold in October, while assigning nearly a 77% chance of a 25bps hike in December. Markets have endured a turbulent week, with both US CPI and PPI data coming in hotter than expected, while a rotation away from AI-related trades prompted a broader flight to safety.

The yield on the US 10-year Treasury note remained below 5.1% on Friday after falling sharply in the previous session, as a global equity selloff boosted safe-haven demand for government bonds. Investors are increasingly pricing in a potential slowdown in the artificial intelligence capital expenditure boom, which has been a major driver of the US economy and financial markets. Meanwhile, market participants continued to evaluate the Federal Reserve’s monetary policy outlook, with stronger-than-expected US economic data reinforcing expectations of further interest rate hikes. Markets are currently pricing in approximately a 72% probability that the Fed will leave rates unchanged this month, while the likelihood of a December rate hike has climbed to 92%. Cleveland Fed President Beth Hammack cautioned that the central bank may need to raise interest rates more aggressively if public inflation expectations deteriorate significantly.

The yield on the US 10-year Treasury note fell nearly 13 basis points to 5.05% on Thursday, amid a broad flight to safety as a global equity sell-off and tech rout due to concerns over the sustainability of AI spending in a high-interest-rate environment. A much hotter-than-expected US PPI report did little to shift expectations that the Fed would keep borrowing costs elevated for longer. US producer prices surged 1.3% month-over-month in September, the largest increase since March 2022 and well above market forecasts of 0.5%. It added to signs of mounting inflationary pressures, following another hotter-than-expected CPI report released yesterday. Meanwhile, retail sales rose 0.8%, significantly exceeding expectations of 0.3%. Traders currently expect the Fed to hold rates steady this month but see a 25bps rate hike in December.