US Treasury yields expose diverging rate bets in Europe

Treasury yields rose Tuesday after Federal Reserve governor Christopher Waller backed a December rate increase, ahead of October inflation data.

Money-market pricing indicated a 98% probability of a quarter-point increase in December, against 84% before Waller spoke, according to LSEG. That shift left investors awaiting consumer-price figures and a Treasury debt sale as the next tests of interest-rate expectations.

December pricing approaches full conviction

Waller expressed support for a 25-basis-point increase at a London conference, while leaving open a larger response if inflation exceeded his expectations. His remarks described his preferred course rather than an announced decision by the Federal Reserve.

The increase in US yields was greater at the shorter maturity. Tradeweb figures showed the two-year yield at 4.613%, up 6.7 basis points, compared with a 2.4-basis-point increase in the 10-year yield to 4.885%.

Those moves contrasted with falling sovereign yields across the eurozone. Germany’s 10-year Bund yield reached 3.246% after declining 2.4 basis points; equivalent French, Belgian and Italian yields recorded larger declines.

October inflation becomes the next test

October consumer-price figures were scheduled for 1330 GMT. Analysts surveyed ahead of the release expected a monthly increase of 0.3%, compared with September’s 0.6%, while their forecast for core inflation was 0.2%, against 0.3% previously.

The core measure excludes food and energy, allowing investors to examine price changes beyond those categories. The forecasts therefore pointed to slower monthly increases in both measures, but they remained estimates rather than reported inflation readings.

Tickmill Group market strategist Patrick Munnelly identified shelter and core services as important components of the release. In his assessment, continued inflation in those areas would maintain pressure on Treasurys and reinforce expectations for December tightening.

Russell Investments senior investment strategist BeiChen Lin also emphasized how widely price increases were spreading across the economy, rather than just the headline reading. Citing employment strength and other indications of economic resilience, Lin said: “Even a minor surprise could seal the deal on a December hike.”

The distinction between the size and breadth of inflation creates a separate test for the report. Under Munnelly’s scenario, persistent shelter or services inflation would matter for rate expectations even as investors assessed whether the overall monthly increase had slowed.

Treasury auction adds a second test

A scheduled $42 billion offering of new 10-year Treasury notes provided another event for investors to assess Tuesday. The auction was still ahead, so the supplied figures contained no result showing how buyers responded to the new debt.

ING senior rates strategists Michiel Tukker and Benjamin Schroeder described a 10-year Treasury yield near 5% as attractive, compared with the reported level of 4.885%. They nevertheless cautioned that yields faced further near-term upside risk and cited shifting investor attention between artificial intelligence and inflation as a source of volatility.

Their assessment separated the appeal of the yield level from the risk of additional increases. If inflation proved stronger or more persistent than expected, the scenarios outlined by Munnelly and Lin pointed toward firmer tightening expectations; whether the data supported those assessments remained unresolved before publication.