Treasury yields drop as Waller backs a Fed rate hold for now

Treasury yields fell after Fed Governor Christopher Waller signaled support for holding rates if inflation keeps slowing toward the Fed’s target.

Treasury prices rose on Thursday as yields declined across maturities by three to five basis points, with the policy-sensitive two-year note leading the move. The two-year yield dropped as much as seven basis points to 4.30%, after rising above 4.40% earlier this week for the first time since January 2025.

Two-year yield leads move

The shift came after Waller said he was “willing to support holding the policy rate at its current level” if inflation continued moving toward the Fed’s 2% objective. A cited inflation gauge was 3.7% in July, down from 4.1% in May, giving investors a fresh marker for the debate over whether tighter policy is still needed.

Tom di Galoma, managing director at Mischler Financial Group, said Waller’s comments brought “some relief” to Treasuries. “It appears he is still in the hold-policy camp” until additional inflation indicators arrive, di Galoma said.

The dollar also weakened after the remarks, falling as much as 0.5% and losing ground against all Group of 10 peers. That move matters beyond currency screens: a softer dollar can ease dollar funding pressure abroad, while lower Treasury yields can reduce the benchmark rate used to price corporate debt, mortgages and emerging-market borrowing.

Swap traders trim hike bets

Market-implied expectations for a Fed increase eased following Waller’s remarks. Swap contracts linked to the September 16 policy decision priced in about half of a quarter-point increase, compared with as much as 18 basis points of tightening earlier this week.

By year-end, traders priced about 33 basis points of cumulative tightening, down from as much as 41 basis points earlier in the week. The earlier repricing came as higher oil prices threatened to slow progress on inflation, according to the source material.

The distinction is narrow but important. A few basis points in the front end of the Treasury curve can carry a large message about expected Fed votes, since shorter maturities are more directly tied to the path of the policy rate than 10-year or 30-year debt.

Waller’s rate stance shifts

Waller’s position has moved over the past year, making his latest comments more closely watched than a routine policy speech. He dissented from Fed decisions to leave rates unchanged in July 2025 and January 2026, favoring cuts at those meetings.

He later adopted a more hawkish tone in remarks on May 22 and July 13, after which Treasury yields rose. Thursday’s comments placed him back nearer the camp willing to wait, provided incoming inflation data continue to support that stance.

The Fed’s internal balance matters because policy is now being set against two competing pressures: inflation still above the 2% goal and a labor market that may be losing momentum. Holding rates would benefit borrowers facing higher financing costs; raising them would favor savers and could reinforce the central bank’s inflation-fighting credibility.

Payrolls set next test

The next major input is the US government’s August employment report due Friday. Economists surveyed ahead of the release estimated a 55,000 gain in nonfarm payrolls, following an unexpected decline in July.

If payrolls are weak and inflation continues to slow, the mechanism for markets is straightforward: investors would have more reason to price a longer hold, potentially lowering short-dated yields, weighing on the dollar and reducing financing costs for rate-sensitive sectors. For the Fed, that path would strengthen the case for patience while it tests whether inflation can keep cooling without further tightening.

If the jobs report is stronger and oil-driven inflation pressure persists, rate-hike expectations could rebuild through the front end of the curve. That would likely lift short Treasury yields, support the dollar and keep pressure on housing, banks and corporate borrowers that are most exposed to changes in short-term rates.

The main open question is whether the July inflation improvement can survive higher energy costs and still coincide with a softer labor market. Until those data arrive, Waller’s remarks give markets a reason to pull back from the most hawkish path without closing the debate inside the Fed.