Treasury yields slid in Asian trade on Thursday as investors absorbed higher-than-expected U.S. inflation data that had prompted a temporary but sharp bond selloff on Wednesday.
Declining oil prices also helped Treasury yields decline. December Brent crude futures fell 1.4% to $104.58 per barrel.
The two-year Treasury yield fell 7 basis points to 4.730%, while the 10-year Treasury yield declined 8.4 basis points to 5.105%, according to Tradeweb.
The U.S. CPI data boosted market expectations of a Federal Reserve interest-rate hike at the Oct. 28 meeting, pushing bets of a hike briefly to 49%, from 22% before the data, according to LSEG data. Expectations of monetary tightening have since receded, and money markets currently price in a 29% probability of a 25-basis-point rate rise this month.
"The latest [CPI] report complicates the Fed's decision this month, as the road back to price stability is looking increasingly difficult to navigate," said Jeffrey Roach, chief economist for LPL Financial.
U.S. consumer prices rose 3.7% from a year earlier, accelerating from August's 3.4% gain, coming in above consensus estimates of a 3.6% increase in a Wall Street Journal survey. The core reading, which strips out volatile food and energy prices, was also higher than forecast.
With U.S. inflation staying above the Fed's 2% target, investors may rethink the neutral policy rate--which neither stimulates nor restricts economic growth.
"The resilience of the U.S. economy raises the possibility that the neutral policy rate is higher than previously assumed," said Julia Hermann, global market strategist at New York Life Investment Management. "But further increases in yields could begin to challenge the very growth resilience that has allowed markets to absorb tighter financial conditions," she said. "The market's sweet spot depends on higher rates remaining a reflection of economic strength," she added.
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