U.S. Treasuries
- The 10-year Treasury yield is currently 5.10%, lower by 10 basis points since last Monday morning. This past week, 10-year bonds traded in a 29-basis point range (5.04% - 5.33%).
- 2-year Treasuries are at 4.75% this morning, 5 basis points lower since last week.
Last Week’s Trading Recap: The 10-year Treasury yield hovered around 5.20% +/- 2-3 basis points until the CPI print Wednesday morning. With the hot CPI print, 10-year Treasury yields initially gapped higher by about 9 basis points (to about 5.30%). Curiously though, something flipped this week with bond yields improving and the stock market weakening. Shortly after the CPI print, red ink with the equity indices driven largely by lower prices for AI related equities, increased buying of Treasuries as a safe haven investment.
The selloff in AI-related equities was most evident with cloud compute companies like CoreWeave which was down 23.51% last week. The NYSE FANG+ Index (AI-related more generally - NVIDIA, Microsoft, Meta, Alphabet, Amazon, and Broadcom) had a -5% decline from Wednesday to Friday. 10-year Treasuries ended the day on Wednesday at 5.19% and then lower again on Thursday to close at 5.05%. With the size of this move, I suspect some bond buying was driven by investors covering trades that were positioned for higher rates. Yields traded incrementally back higher on Friday and this morning.
Last Week’s Economic Data
As discussed above, bonds rallied last week despite a hawkish run of economic data. CPI, PPI and import prices all printed well above consensus on headline and core measures. The Fed’s Beige Book flagged intensifying price pressures with softening growth and jobless claims confirmed a still-tight labor market. While headline retail sales were buoyed by energy prices, the retail sales control group was lower and bond friendly.
- Consumer Price Index, CPI (September): Headline CPI rose +0.6% MoM: August’s print was +0.4% for the month. For the year, headline CPI printed at +3.74% (August was 3.4% and the forecast was +3.6%). Core CPI (without food and energy prices printed at +0.3% MoM, the same as August, however the forecast was for +0.2%. Core CPI printed at +2.6% for the year, versus +2.4% as of August).
- Producer Price Index, PPI (September): Headline PPI printed +1.3% MoM (versus prior at +0.5% as revised, consensus: +0.6%) and +6.3% YoY (versus prior: +5.6% as revised and the consensus estimate: +5.4%). Core PPI ex-food and energy printed +0.7% MoM (versus prior: +0.2%, and the consensus estimate: +0.3%) and +5.0% YoY (versus prior: +4.8% revised, consensus: +4.4%).
- Import Prices (September): Import prices printed +1.1% vs.1% the forecast and August’s +0.5% result, as revised. YoY, import prices were higher 8.1%, the highest pace since August 2022. Ex-petroleum, import prices rose 0.8% vs. 0.6% expected and more than the 0.5% gain in August, as revised.
- Retail Sales (September): Headline retail sales printed at +0.8% MoM (August was +1.3% as revised, consensus forecast was +0.3%). While the headline print was a significant beat, the retail sales control group (excluding autos, gasoline, food services, and building materials) printed at just +0.1% MoM (versus the prior month at +1.2%, as revised, consensus forecast at +0.25%).
- Weekly Jobless Claims: For the week ending October 10, 2026, initial jobless claims printed at 199K (versus the prior week at 198K, as revised); confirming that the labor market remains solid.
Fed Monetary Policy
There’s an argument that the hot CPI and PPI inflation prints could spur the Fed to move rates higher at the FOMC meeting later this month (10/27-28). However, the consensus among Fed watchers is that the FOMC will skip raising rates this time with congressional mid-term elections taking place the following week.
The effective Fed funds rate currently stands at 3.88%, with the Fed's target range of 3.75% to 4.00%. Market pricing implies about a 17% chance of a quarter point increase at the October meeting, somewhat higher than what was implied before the CPI/PPI inflation numbers but still not signaling a hike. The yield curve suggests a Fed Funds rate increase of 25 basis points at the FOMC December 9 meeting, followed by an additional 25 basis points in both the first and second quarters of 2027.
My Take on Longer Term Yields
As Yogi Berra supposedly said, "It's tough to make predictions, especially about the future."
Last week, long-end Treasuries appeared to have reclaimed some of their traditional safe-haven characteristics, taking their cues from risk-off sentiment in AI-related equities. What's particularly notable is that yields moved lower despite inflation data that came in above expectations and economic data that continued to point to a healthy underlying economy. The bond market also appeared somewhat less sensitive to moves in crude oil and headlines surrounding the Iran war.
The obvious question is why. Are lower yields simply the result of risk-off sentiment in equities? Are bond investors beginning to see signs that economic growth may weaken ahead? Is the market increasingly confident that the Iran war will ultimately resolve? Or did the recent backup in yields simply create an attractive entry point, with long-end Treasury yields north of 5% representing good value?
My inclination is that 10-year bonds retest 5.25% or higher. Inflation data continues to surprise to the upside, and I am not ready to dismiss the influence of energy prices and geopolitical risk on inflation expectations. I remain cautious about assuming a smooth resolution with the Iran war. Any renewed escalation could push crude oil prices higher, placing upward pressure on inflation expectations and Treasury yields.
In the meantime, continue to watch the primary drivers of rates: inflation, crude oil, equities, and global sovereign bond yields.
This Week’s Economic Data
The economic calendar is fairly light this week. The primary focus will be the S&P Global PMI surveys, the University of Michigan inflation expectations data, and Weekly Jobless Claims for signs of whether growth is slowing and inflation pressures are moderating.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.