Key Highlights

  • The 10-year Treasury yield fell more than 1 basis point to 5.123% on Tuesday, after housing starts missed forecasts.
  • 30-year yield fell over 3 basis points to 5.44%; 2-year slipped over 2 basis points to 4.783%.
  • Housing starts fell 5.2% to 1.22 million, well below the forecast of 1.3 million, pressuring rate sensitive sectors.
  • CME FedWatch puts an 85% chance on a Fed hold, up from 42.4% a month ago.

Yields Edge Lower Across the Curve

The 10-year Treasury yield fell more than 1 basis point to 5.123% on Tuesday. The 30-year yield fell more than 3 basis points to 5.44%, and the 2-year yield fell more than 2 basis points to 4.783%.

Those levels put the gap between the 10-year and 2-year yields at about 34 basis points, and the gap between the 30-year and 10-year at about 32 basis points. The 10-year yield had fallen nearly 13 basis points to 5.05% on October 15 before edging up to 5.12% on October 16.

Housing Starts Miss Forecasts

Housing starts fell 5.2% to 1.22 million, against a forecast of 1.3 million. A chief economist at a fixed-income research firm said the weakness is unsurprising given builder pessimism, a labor shortage tied to immigration policy and geopolitical inflation risks.

Pending home sales, reported earlier, stand at a record low. Both readings reflect the effect of higher borrowing costs on a market where mortgage rates track long-dated Treasury yields.

With the 10-year yield at 5.123%, it sits between about 112 and 137 basis points above the federal funds range of 3.75% to 4%.

Fed Pricing Shifts Toward a Hold

CME FedWatch puts an 85% chance on a Fed hold at the October 27 and 28 meeting, up from 42.4% a month ago. The Fed raised rates by 25 basis points on September 16, to a range of 3.75% to 4%, in a unanimous vote.

Fed Chair Kevin Warsh declined to say whether the central bank hikes again this month, saying he does not "prejudge meetings." Markets also price an increase at the December 9 meeting, and one Wall Street bank expects a second and final quarter point hike then. Fixed income markets project consecutive hikes starting in early 2027, with short term rates possibly reaching 5%. Minutes released October 7 showed most participants saw another hike as appropriate before the end of 2026.

Inflation Backdrop and Data Calendar

September headline CPI rose 3.7% year over year, up from 3.4% in August, with gasoline accounting for more than half of the monthly increase. Core CPI rose to 2.6% from 2.4%.

Jobless claims are due on Thursday, and the PCE inflation report is scheduled for next week. Each release gives traders a fresh read on the labor market and prices ahead of the Fed meeting. Headline CPI has risen faster than the Fed's 2% goal for five years, and much of the recent pressure traces to energy prices tied to disrupted Middle East supply chains. The September rate increase was the first since 2023, and the Fed said the increase supports a timelier return to its goal.