Williams comments cool October Fed hike bets as bond yields stay high

Investors pulled back from expectations of another US interest-rate increase in October after New York Federal Reserve President John Williams indicated that policymakers could wait and assess the economy. The shift helped push the two-year Treasury yield lower, although longer-term borrowing costs stayed elevated and major US share indexes ended modestly weaker.

Reporting from Devdiscourse said futures markets came to reflect roughly an even chance of a quarter-point increase at the Fed’s next meeting, compared with a probability of nearly 70% earlier in the session. Contracts also pointed to just one additional rate increase before the end of the year, matching Williams’ expectation if economic conditions develop as he anticipates.

Williams said there was “no urgency” to take further action after the central bank raised its policy rate earlier this month. That increase was the Fed’s first since 2023 and came as officials sought to contain inflation that remains above their target.

Bond markets remain under pressure

The two-year Treasury yield, which is particularly sensitive to expectations for Fed policy, fell 3.51 basis points to 4.889%. It had reached 4.9596% earlier, its highest level since May 2024.

The move in shorter-dated debt contrasted with continued pressure farther along the yield curve. The benchmark 10-year yield added 1.32 basis points to 5.255%, after touching 5.2932%, a level not seen since June 2007. The 30-year yield gained three basis points to 5.592%, having earlier reached its highest point since June 2002.

Investors were cautious ahead of two important US economic releases. The monthly personal consumption expenditures price index, a closely watched measure of inflation, was due on Wednesday, while the latest jobs report was expected later in the week. A renewed rise in inflation could strengthen the case for an October move, particularly after the recent increase in energy prices.

Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said investors were preparing for the inflation data and that an acceleration in prices could make an October hike more likely. The bond market’s anxiety has also been linked to higher oil costs connected with the seven-month-old conflict in the Middle East.

Other Fed officials reinforced the focus on persistent inflation. Chicago Fed President Austan Goolsbee warned that allowing price growth to remain above the central bank’s goal for five and a half years would be dangerous. He also said policymakers might have to respond if a supply disruption produced lasting inflationary effects.

September consumer-confidence data added to the uncertainty. The survey showed confidence falling to its lowest level in more than 12 years, with households expecting business conditions and employment prospects to deteriorate during the following six months.

Equities and global borrowing costs

US stocks gave up ground but avoided a sharper decline. The Dow Jones Industrial Average lost 131.59 points, or 0.26%, to finish at 51,349.92. The S&P 500 fell 12.85 points, or 0.17%, to 7,670.84, while the Nasdaq Composite slipped 22.84 points, or 0.08%, to 26,797.54.

A proposed stock-market listing by artificial-intelligence company Anthropic helped limit the retreat. Its prospectus showed substantial growth over the past year alongside larger losses. The company is seeking a valuation above $2 trillion, a target that could influence how investors value other major AI businesses.

Higher sovereign yields matter beyond government debt markets. They provide a reference point for pricing riskier assets and influence mortgage rates and corporate borrowing costs. When yields rise, governments, businesses and households face greater financing expenses. The pressure was visible in Europe, where French 10-year yields remained close to highs last reached in 2008 and were on course for their largest monthly increase since 2022.

The MSCI global equity gauge declined 0.30% to 1,135.86, while the pan-European STOXX 600 fell 0.09%. The day’s moves reflected a broader tension: hopes that the Fed may pause supported shorter-term bonds, but concerns over inflation and the level of long-term yields continued to weigh on markets.

Oil and currencies

Oil prices fell as traders focused on indications that crude exports from the Middle East could be recovering. US crude futures dropped $3.22 to settle at $89.38 a barrel, while Brent declined $2.69 to $102.59.

The decline came despite fading expectations of a US-Iran peace agreement. President Donald Trump denied reports that he was prepared to offer sanctions relief or release frozen funds in exchange for steps concerning Iran’s nuclear programme, saying he had made no such offer.

Currency markets were comparatively steady. The euro edged up 0.01% to $1.1341, while the dollar gained 0.03% against the Japanese yen to 157.32. The Australian dollar was little changed at $0.6984 after Australia’s central bank raised interest rates to a 15-year high.