Macro Monthly, October 2026: US Treasury Yield Assessment and Top 10 Factors
Market Commentary · Rates
Why US Treasury yields are high, and the 10 factors that control them now
US Treasury yields are at their highest levels since 2002. The 10-year yield is 5.28%, and the 30-year yield is 5.63%. Since the start of the year, the 2-year yield increased by 136 bp and the 10-year yield increased by 109 bp. The Fed caused part of this increase, because it increased rates in September for the first time since 2023. But long-term yields increased more than the Fed path explains. Term premium, large Treasury supply, a diesel shock and a global bond sell-off are also causes.
Now the market has two opposite signals. Inflation is high, and core PCE has remained at or above 3% in recent months. But job growth is weak, and credit spreads start to increase. This decreases front-end yields and keeps long-end yields high. Thus, the curve is steeper, and the 2s10s spread is 45 bp.
The 10 factors below control yields now. We rank each factor by its expected effect on yields during the next month, and rank 1 has the largest effect. Each factor shows the latest value, the date of the next release, and the reason that it is important. The last section gives our one-month forecast for the curve and connects it to SOFR.
Data as of Monday, October 5, 2026.
Ranking by importance
The last CPI report, and probably the most important consumer inflation release, comes out before the October FOMC meeting. Thus, it has the largest scheduled effect on the 2-year yield this month. In August, energy caused most of the headline increase. Energy prices were 16% higher than one year before. Shelter inflation decreased, but service prices without shelter stayed high. If core CPI increases 0.4% or more, the market will price a December rate increase again.
Diesel is more important for inflation than crude oil now, because the shortage is in distillate fuel. Russia stopped diesel exports, and attacks damaged refineries in the Middle East. Diesel sets the cost of freight, farm work and goods delivery, so it can go into core prices. US distillate inventories are low, and fall refinery maintenance and harvest demand increase the risk. The G7 reserve release includes diesel, and on September 28 the weekly price decreased for the first time since August 31. Most fuel surcharges use this price, so a new record can quickly increase goods prices.
The FOMC increased the rate by 0.25% on September 16, with a vote of 12 to 0. The median forecast in the dot plot shows one more increase in 2026. After the weak jobs report, the market moved the expected increase from October to December. The minutes on October 7 will show how many officials want a second increase soon. Foreign tightening could marginally reduce external inflation pressure on the US, although Warsh did not present it as a substitute for domestic policy tightening.
Long yields did not decrease after the weak jobs data. Market breakeven inflation was approximately 2.2% to 2.3% in early August. This is consistent with real yields and term premium as the primary causes of the increase in long yields. Strategists say that Treasury supply increases while demand from usual long-term buyers decreases. High long yields make financial conditions tighter. This can decrease the need for more Fed rate increases.
The high yield spread increased by 31 bp in one week. Higher Treasury yields increase the cost of new debt for weak companies, and the spread is consistent with this stress. The CCC spread is more than 12%, so the weakest companies have the most stress. Since October 2023, the spread was between 259 bp and 461 bp. If the spread increases above approximately 400 bp, investors can buy Treasuries for safety. This decreases Treasury yields and decreases the probability of a December rate increase.
This report changed the near-term Fed path. After the report, the probability of no rate change in October increased to approximately 85%. Through September, payrolls increased by an average of 68,000 per month in 2026, down from 80,000 through August. The 3-month average is approximately 51,000, and July is now the first decrease since February. The unemployment rate stays in a range of 4.1% to 4.2%, and a larger labor force caused most of the September increase. BLS publishes the October report on November 6, one day after the end of this forecast.
High yields are not only a US problem. Energy inflation, central bank rate increases and large government debt caused a global bond sell-off. On September 1, the Japan 10-year yield was 3% for the first time since 1996. Euro area yields were at their highest levels in more than 10 years. When yields in Japan increase, Japanese investors can buy fewer foreign bonds. This decreases the demand for long-term Treasuries.
PCE is the inflation measure that the Fed uses for its 2% target. Core PCE has remained at or above 3% in recent months. This is one reason that the Fed started to increase rates again. The August value was much lower than the forecast, and this helped move the expected rate increase to December. The September value comes one day after the FOMC decision. Thus, it has an effect on the December decision, not on the October decision.
Private credit lends to medium-size companies, and most of these loans have floating rates that follow SOFR. Thus, the September rate increase made interest costs higher for these borrowers. Fitch recorded 14 defaults in August, and stressed maturity extensions were 45% of them. In the third quarter, redemption requests decreased at most large funds, and most funds continue to limit payouts to 5% per quarter. On September 28, SEC staff told registrants, which include BDCs and registered funds, to use particular care when they value private credit. A large credit event can cause the Fed to stop rate increases, and this decreases front-end yields.
Sources: Fitch Ratings, US private credit default report, September 14, 2026. SEC, Statement on Fair Value Measurement and Disclosure Considerations for Private Assets, Kurt Hohl (Chief Accountant) and Brian Daly (Director, Division of Investment Management), September 28, 2026.
An energy shock becomes a larger problem for the Fed if households expect more inflation. The 1-year expectation increased from 4.0% to 4.6% in September. The 5-year expectation increased to 3.4% after three months at 3.3%, above its 2024 range of 2.8% to 3.2%. If the 5-year value increases again, the Fed can increase rates in December, although payrolls stay weak.
Also on watch
These factors are not in the top 10 now. They can move up in the ranking if they surprise.
Claims show the opposite of the weak payroll data. Claims stayed below 200,000 for three weeks. This is near the lowest level since 1969. Thus, companies do not hire many workers, but they also do not dismiss many workers. If claims stay above approximately 230,000, this is the first clear sign of a weak labor market.
GDP shows if the economy is strong while hiring is weak. Strong output with weak hiring can show higher productivity. This result tells the market that the labor market is stronger than the payroll data shows. GDP and PCE come out on the same morning. Thus, the rates market gets two large reports one day after the FOMC decision.
Treasury yield curve forecast to early November
We expect a small decrease in short-term yields. It is probable that the Fed will not change rates in October, and the weak jobs data has an effect. We expect long-term yields to stay high because of supply, term premium and diesel. In our base case, the curve becomes steeper. The 2s10s spread increases from approximately 45 bp to approximately 52 bp. Select a scenario to compare the forecasts.
The Fed does not change rates on October 28. September core CPI is near 0.3%, and diesel stays near $6.40 per gallon. The probability of a December increase stays below 50%. The 2-year yield decreases by approximately 10 bp. The long end does not change much.
SOFR is almost equal to the fed funds rate. This is consistent with no stress in repo funding now.
Bills yield more than overnight repo. This is consistent with a higher policy rate within three months.
This is consistent with the rate increases that the market expects. Our base case decreases it to approximately 86 bp.
| Tenor | Oct 2 | Forecast | Change | Primary cause |
|---|---|---|---|---|
| SOFR (overnight) | 3.87% | 3.87% | 0 bp | Overnight repo rate. It follows the fed funds range. No change is expected before the December 9 decision. |
| 1M | 4.04% | 4.04% | 0 bp | The fed funds rate sets this yield. The market expects no change on October 28. |
| 2M | 4.11% | 4.10% | −1 bp | The fed funds rate sets this yield. The market expects no change on October 28. |
| 3M | 4.19% | 4.18% | −1 bp | Includes the October and December meetings. Changes only if the market expects an earlier increase. |
| 6M | 4.27% | 4.24% | −3 bp | Includes the December meeting. Decreases by a small quantity if the probability of an increase decreases. |
| 1Y | 4.46% | 4.40% | −6 bp | Is consistent with the expected rate path into 2027. Decreases if the labor data stays weak. |
| 2Y | 4.83% | 4.73% | −10 bp | Is consistent with market expectations for the Fed. CPI on October 14 and the labor data have the largest effect. |
| 3Y | 4.96% | 4.87% | −9 bp | Moves with the 2-year yield, with a small term premium. |
| 5Y | 5.06% | 4.99% | −7 bp | The center of the curve. CPI and PCE surprises have a large effect. |
| 7Y | 5.17% | 5.12% | −5 bp | Is consistent with a first effect from long-term supply. |
| 10Y | 5.28% | 5.25% | −3 bp | At the highest level since 2002. Weak data decreases it, but supply and diesel keep it high. |
| 20Y | 5.67% | 5.68% | +1 bp | High compared to the curve. Large supply and weak demand keep it high. |
| 30Y | 5.63% | 5.65% | +2 bp | Term premium and inflation risk premium control it. No change or a small increase. |
Front end: stable, small decrease
Bill yields stay near the fed funds range of 3.75% to 4.00%. The 1-year and 2-year yields can decrease the most. The market prices only part of a December increase, and weak labor data decreases that probability.
Belly: most sensitive to data
The 3-year to 7-year yields move with CPI on October 14 and PCE on October 29. A surprise in either direction shows here first.
Long end: stays high
We expect no large change in the 10-year yield. We expect the 20-year and 30-year yields to stay level or to increase by a small quantity. Supply and term premium are the primary causes. Diesel keeps an inflation risk premium in long yields.
Yields are US Treasury par curve rates at the close on October 2, 2026. SOFR, EFFR and credit spreads are from October 1, 2026. This page does not update automatically. The forecasts are our estimates for approximately November 5, 2026. They are not market forecasts and they are not investment advice. Dates with “expected” or “TBC” do not have confirmation from the agency that releases the data.
Sources: BLS, BEA, EIA, Federal Reserve, New York Fed (SOFR, EFFR), US Treasury, ICE BofA indices via FRED, Fitch, University of Michigan, CME FedWatch, and market reports from CNBC, Reuters and others.
