Rates: Waiting for the Fed to follow through
The bond market is pricing in a Fed move this week on the back of firm CPI data.
Group Research - Econs, Eugene Leow14 Sep 2026
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With CPI and core CPI running at 0.4% and 0.3% MoM sa respectively, investors are betting that Fed Chair Warsh will have to follow through on his hawkish Jackson Hole speech. We also note that inflation expectations are also muddied by the worsening of the US-Iran conflict that pushed Brent crude prices towards USD 105/bbl. Note that there was a concomitant rise in 2Y breakeven to 2.5% over the past few weeks as tensions escalate. Amidst a resilient labour market and still-sticky inflation, all eyes will be on the FOMC meeting. 

The momentum towards higher yields is strong across the curve with 2Y and 10Y yields at 4.6% and around 5.0% respectively. In the frontend of the curve, the odds of an imminent hike have risen to 88% as data and rhetoric has now aligned towards tightening. That said, the extent of normalization priced is now looking excessive. More than three hikes are now factored in by end-2027. We are somewhat concerned that the long-end of the curve is still facing upward pressure. Yields have risen with recent auction results indicating investors interest. Yet, this was insufficient to arrest the fall in Treasuries. 

There are a few events that could prompt a rally in long-end Treasuries. First, the Fed can act and sound hawkish. Any dovish message (such as not hiking this week) would probably twist-steepen the UST curve. Second, the Fed or Treasury could buy long-end bonds. Third, rates rise to the point where they are too restrictive (possibly by oil prices or momentum trading) for the economy and / or the different asset classes. In both cases, financial conditions deteriorate sufficiently to put a halt to the UST selloff. This week, there is a chance for the Fed to act more hawkish. We will also be watching to see if selling exhaustion in USTs materialise. 

Forecast changes
Bund yields forecasts have been revised higher on the back of firm economic growth and persistent speculation of an extended ECB hike cycle.



Eugene Leow

Senior Rates Strategist - G3 & Asia
eugeneleow@dbs.com



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