(Bloomberg) -- Treasuries rose after Federal Reserve Governor Christopher Waller said he'd be inclined to leave interest rates unchanged as long as inflation continues to slow.
The rally on Thursday trimmed yields across maturities by three to five basis points, led by the two-year, which is more sensitive than longer-dated tenors to Fed rate changes. The two-year yield, which topped 4.40% this week for the first time since January 2025 in anticipation of a Fed rate increase this month, declined as much as seven basis points to 4.30%. The dollar fell as much as 0.5%, losing value against all of its Group of 10 peers.
Waller's comments caused "some relief" in Treasuries, said Tom di Galoma, managing director at Mischler Financial Group. "It appears he is still in the hold-policy camp" until additional inflation indicators appear.
Waller said he was "willing to support holding the policy rate at its current level" if inflation continued moving toward the Fed's 2% target. That gauge was 3.7% in July, down from 4.1% in May.
Waller's views have been in flux in the past year. In July 2025 and January 2026 he dissented from Fed votes to leave rates unchanged in favor of cutting them. He pivoted toward a hawkish view in comments on May 22 and July 13, spurring increases in Treasury yields.
Market-implied expectations for Fed rate increases ebbed after Waller spoke. Swap contracts linked to the next policy decision on Sept. 16 priced in only about half of a quarter-point increase and a cumulative 33 basis points by year-end. Earlier this week, they priced in as much as 18 basis points of tightening for September and as much as 41 basis points by year-end as rising oil prices threatened to halt progress on inflation
Fed policy expectations also are subject to the condition of the labor market, which stands to be clarified on Friday by the US government's August employment report. Economists in a Bloomberg poll estimated it will show a 55,000 increase in nonfarm jobs following July's unexpected drop.
Bond-market gains on weak employment data are likely to be limited, di Galoma said, because when US markets reopen after Monday's Labor Day holiday, a supply surge will include Treasury auctions of three-, 10- and 30-year debt and an anticipated rebound in sales of new corporate bonds.
What Bloomberg strategists say...
"The pullback in rate-hike expectations indicates traders are growing doubtful that Chairman Kevin Warsh will follow through on this hawkish speech. Even if next week's data justify policymakers' cautious stance toward the idea of raising rates again, a Fed on the sidelines would revive credibility concerns."
— Tatiana Darie, Macro Strategist, Markets Live.
--With assistance from Anya Andrianova and Edward Bolingbroke.
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