Fidelity's Timmer says sticky inflation and fiscal risk drove bond yields up, though yields eased last week.
Last week saw a pullback in bond yields, with the 10-year Treasury falling 14.6 basis points. According to Fidelity's Jurrien Timmer, a trading range could be emerging, though he attributes the earlier increase to persistent inflation and fiscal concerns.
The decline came after a Consumer Price Index (CPI) report that was hotter than anticipated — annual inflation came in at 3.7%, versus a 3.6% forecast. The Federal Reserve is scheduled to meet on October 27-28 and will consider another rate increase.
Timmer dismissed the straightforward narrative, posting on X that it oversimplifies the situation. According to that narrative, rising economic growth pushed yields higher while concerns over AI capital expenditures (capex) dragged them lower.
His own analysis is more comprehensive.
“in my view the rise in yields this year has been multi-factorial, including sticky structural inflation and mounting fiscal risk.”
Jurrien Timmer, Director of Global Macro at Fidelity Investments, in a post
Data from XTB Research indicates that the 10-year yield hit 5.33% temporarily following the October 14 report. Excluding food and energy, core CPI increased 2.6% on an annual basis, compared with a 2.5% expectation.
Subsequently, yields turned around. The decline was reportedly the steepest weekly drop in seven months. Treasuries drew safe-haven bids as a sell-off in chip stocks, driven by uncertainty over AI spending, unfolded.
There is currently a low probability of a rate increase priced in by markets. According to CME Group’s FedWatch tool, which monitors futures contracts, the likelihood stood at 17.2% on Monday, a sharp decline from 57.6% one month prior.
Still, central bank officials have not ruled out further tightening. John Williams, president of the New York Fed, continues to anticipate another rate increase in 2026.
Bank of America is also maintaining its forecast for a rate hike in October, although economist Aditya Bhave expressed limited conviction in that call.
Data from Reuters show the 10-year breakeven rate, derived from Treasury inflation-protected securities, was around 2.36% on Monday. This rate suggests an average annual inflation expectation of roughly 2.4% over the next ten years.
That combination could leave equity and cryptocurrency markets responsive to both AI spending news and inflation data releases.
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Japan's core inflation rate rose to 2.1% in September, breaching the Bank of Japan's 2% target for the first time since December and supporting the yen.
Japan's flash composite PMI held at 52.3 in October as services offset a factory slowdown; hiring cooled and cost pressures persisted.
Australia's private sector shrank in October for the first time in five months, with input costs rising at the fastest pace since May.
ECB's Panetta warns rising yields weigh on euro zone growth rather than cause a crisis, with French and Italian debt most exposed.