US Treasury yields surged then pulled back after the CPI release, as the market assesses inflation data and remarks from Federal Reserve officials.

Overnight during U.S. trading hours, U.S. Treasury prices rallied sharply, reversing the sell-off sparked by the latest higher inflation data, with yields on most Treasury maturities turning lower. This highlights the market’s conflicting bets on two scenarios: one is accelerating consumer price data, the other is Federal Reserve officials signaling no urgency to raise interest rates further. Official U.S. data showed that September’s year-over-year Consumer Price Index (CPI) rose 3.7%, exceeding the market expectation of 3.6%. After the data release, the 2-year Treasury yield climbed to its highest level in over two weeks, before retreating from intraday highs alongside long-dated Treasury yields. Meanwhile, traders’ bets on a Federal Reserve rate hike in October rose to around 40% from 22% prior to the data; as of press time, that probability has fallen back to 33%. TD Securities U.S. rates strategist Brooks said the shifts in rate hike odds and Treasury yields are likely closely tied to recent dovish remarks from multiple Fed officials, including New York Fed President John Williams and Fed Vice Chair Philip Jefferson. Brooks noted that for now, a 50/50 chance of an October rate hike seems reasonable, as the data may be sending one signal while the Fed is conveying another.