Treasuries: US 2-year yield turns lower on dovish Fed comments

Skydance

29/09/2026 21:16

October Fed rate hike chances ease to 50% from nearly 70%, LSEG data shows
Benchmark 10-year Treasury yield touches 5.2932%, highest since mid-June 2007, before retracing
2-year yield reverses lower after dovish comments by Fed's Williams
US consumer confidence index drops 6.7 points to 81.9 in September
Updates prices to late afternoon
By Sinéad Carew
Sept 29 (Reuters) - The yield on rate-sensitive US 2-year Treasuries fell on Tuesday after Federal Reserve Bank of New York President John Williams said he thought the US central bank has time to weigh economic data before deciding when to hike interest rates again.
Traders trimmed their expectations for an October hike after the comments and were last betting on a 50-50 chance for a quarter-point rate hike at the Fed's next meeting, based on pricing of fed funds futures contracts.
That compares with bets on a nearly 70% probability for a hike earlier in the day, according to LSEG data. 

        Short-term rate futures contracts are now priced for one more interest-rate hike by year-end after Williams said that is what he sees as likely, should the economy play out as he expects.
There is "no need for urgency" after the Fed raised rates by 25 basis points in September, Williams said in remarks prepared for a presentation on Tuesday.
The 2-year yield turned lower in late afternoon trading, after touching its highest level since May 2024 earlier in the day. The 30-year US Treasury yield touched its highest level since 2002. 
Oil prices declined as investors focused on signs of recovering crude exports from the Middle East, while officials said US and Iranian officials spoke separately with mediators in a renewed effort to end seven months of war. 
Earlier on Tuesday, a Conference Board report showed that US consumer confidence dropped to its lowest level in more than 12 years in September, with households expecting both business conditions and the labor market to weaken over the next six months. The Conference Board said its consumer confidence index fell 6.7 points to 81.9, its lowest level since 2014 and well below economist expectations for 89.2. 
In the labor market, job openings for August fell to 7.08 million versus consensus expectations for 7.23 million and July's 7.34 million.
Meanwhile, investors were waiting for Wednesday's final reading of the August Personal Consumption Expenditures price index, which is closely watched by the Fed. That will be followed by September's nonfarm payrolls report on Friday.
"It is, at the moment, the path of least resistance to test higher. We had consumer confidence data this morning, which was awful, yet yields have risen," said Padhraic Garvey, head of research at ING America. He pointed to trends such as elevated inflation, central bank interest rate hikes and "astonishingly high" inflation-adjusted rates.
"Typically, if you see a weak consumer confidence number that's bullish for bonds. Typically, that's talking about a slowing economy, which would be deflationary and would cause yields to fall. But that's not what's happened today," he said.
"This market just wants to test the upside because the rationale for that move is still staring us in the face. Tomorrow we'll confirm that we're a 3.5% inflation economy. We know it already, but it'll just confirm it again and that's a problem from the Fed's perspective," he said.
Commentary from Fed officials was mixed, with Chicago Fed President Austan Goolsbee saying that allowing inflation to stay above the Fed's target for 5-1/2 years is "playing with fire," noting that the Fed may need to respond to a supply shock that has long-lasting effects.
St. Louis Fed President Alberto Musalem said that US economic strength right now depends in part on an optimistic outlook for the developing artificial intelligence industry, creating a potential downside risk if those expectations are not met.
The yield on benchmark US 10-year notes US10YT=RR was up 1.32 basis points at 5.255%, after earlier touching 5.2932%, its highest level since mid-June 2007.
The 30-year bond US30YT=RR yield rose 3 basis points to 5.592%, after hitting its highest level since June 2002 in morning trading. 
The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 3.51 basis points to 4.889%, after earlier touching 4.9596%, its highest point since May 2024. 
A closely watched part of the US Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at a positive 36.4 basis points. 
Earlier, Tom di Galoma, managing director at Mischler Financial, said that fixed-income investors, in addition to monitoring oil prices, were watching the European bond market. A selloff in that market paused on Tuesday, although yields stayed close to their highest in years as robust growth and elevated energy costs are expected to push global interest rates higher. 
"Investors are looking at this and saying we've got some very decent levels to buy paper. There's enough things that are going on with AI and with stocks and geopolitical issues that accounts will be paid off by buying dips," di Galoma said, adding that investors are also waiting on economic data and Fed speakers.
He also said heavy corporate supply was putting some pressure on the market after Paramount Skydance PSKY.O announced on Monday that it would offer $44.4 billion in notes.

 (Reporting by Sinead Carew; Editing by Will Dunham and Edmund Klamann)
 ((sinead.carew@thomsonreuters.com))