U.S. Treasury yields remain high, markets await CPI and Waller this week: Bets on further rate hikes possibly postponed until December

According to Jinzi Finance APP, after the Federal Reserve unanimously approved a rate hike last month, US Treasury yields soared sharply; last week saw little change, with yields hovering near 24-year highs. In the new week, investors are waiting for two things: fresh data, and hints from Fed Chair Kevin Walsh on how quickly the Fed might continue raising rates.

Selling restrained by jobs data, yields holding at high levels

This round of bond sell-off was curbed by the nonfarm payrolls report, which showed a marked slowdown in job growth. This has led traders to expect the Fed will stand pat at its next meeting at the end of October—they still expect a 25 bp hike in December, and two more hikes before the end of 2027.

According to reports, the 10-year US Treasury yield reached 5.364% during trading on October 7, the highest since 2002, while the 30-year yield reached 5.696% over the same period; the 10-year yield has climbed nearly 120 basis points so far this year, making the third quarter the worst for US Treasuries since 1994.

Risk is asymmetric: higher CPI is far more troublesome than lower

The current positioning is increasing a particular risk: if the September Consumer Price Index (CPI) rises more than expected, it could reignite this round of selling, as it would increase pressure on the Fed to raise rates more aggressively.

Molly Brooks, US Rates Strategist at TD Securities, believes the risk in this CPI report is asymmetric—a hotter print may indicate the Fed needs to speed up tightening; a weaker or in-line number would continue to support a cautious approach by the Fed going forward.

The September CPI is scheduled to be released on Wednesday, October 14. According to a survey of economists, month-on-month CPI is expected to rise 0.6%, up from the previous 0.4%. Excluding volatile food and energy prices, core CPI is expected to ease from 0.3% to 0.2% month-on-month. Both annual indicators are expected to rise, with overall CPI at 3.6% and core CPI at 2.5%.

Walsh’s window: last week before the blackout period

Walsh will participate in a panel discussion at the International Monetary Fund (IMF) annual meeting in Bangkok, Thailand, on Thursday. Two other closely watched officials—Fed Governor Christopher Waller and Cleveland Fed President Beth Hammack—will also be speaking. The Fed will enter its customary communications blackout period starting Saturday, which will last until the two-day policy meeting ending October 28.

Brooks said: "This will be the last week before the blackout period, so the Fed's comments after the CPI report will help the market face less uncertainty about the outcome of the next meeting." She also added: "Walsh may continue to skirt forward guidance, which is what the market is expecting."

Interest rate futures currently imply about an 80% chance of no change at the October meeting; after September’s nonfarm payrolls showed only a 29,000 increase, market pricing for a rate hike in October has dropped from around 70% to 20%-25%. On October 8, Waller stated that rate hikes "do not have to take place at consecutive meetings"—which the market interpreted as a signal for a potential pause in October. Additionally, the bond market is closed on Monday for a public holiday, while the US stock market will trade as usual.