Bond Market Stabilizes as Fed's Waller Signals September Rate Hold

A battered bond market caught its breath on Thursday after Fed Governor Chris Waller signaled he would support keeping interest rates unchanged at the Fed's upcoming September meeting — provided inflation data doesn't deliver an ugly surprise. His comments marked a sharp pivot in tone from the turbulence of earlier in the week, when a global bond sell-off sent yields spiking to multi-year highs.

Markets moved quickly to reprice rate expectations. Odds of a September hike fell from 63% to 50% according to the CME FedWatch tool, while the 2-year Treasury yield — the most Fed-sensitive part of the curve — dropped 4 basis points to 4.34%. The 10-year yield pulled back to 4.77% after briefly touching 4.81% on Wednesday, its highest level since 2023. New York Fed President John Williams added fuel to the rally, calling recent inflation data 'encouraging' and framing the yield spike as merely reflecting a strong economy rather than a policy alarm signal.

Stocks surged on the improved rate outlook. The Dow jumped more than 600 points — its best single-day performance in a month — while the S&P 500 and Nasdaq 100 each climbed more than 1% as investors piled back into risk assets. Goldman Sachs economists noted that Waller's speech was read as definitively dovish by bond markets, while EY chief economist Gregory Daco cautioned the hold is contingent on continued disinflation, warning that a hot August CPI print could reopen the door to a hike.

The underlying tensions haven't disappeared. The bond sell-off this week was driven by persistent worries about the US deficit, sticky inflation, and geopolitical risk — particularly the Iran conflict, which has pushed Brent crude close to $96 a barrel and raised fears of a breach of the psychologically significant $100 threshold. August inflation data, due next week, will be the critical swing factor determining whether the Fed's pause holds or fractures.