TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 4+ TICKS HIGHER AT 104-28

T-notes tumble on hot core CPI before gradually paring losses by settlement. At settlement, 2-year +0.9bps at 4.806%, 3-year -0.2bps at 4.915%, 5-year -1.6bps at 4.992%, 7-year -2.4bps at 5.089%, 10-year -3.0bps at 5.187%, 20-year -3.9bps at 5.574%, 30-year -3.9bps at 5.524%.

THE DAY: Treasuries saw two-way price action on Wednesday, with T-notes initially tumbling following the hotter-than-expected US CPI report. Core inflation exceeded forecasts on both a M/M and Y/Y basis, while headline CPI was hotter than expected Y/Y but broadly in line M/M. The upside surprise in core inflation prompted traders to bolster expectations for an October Fed rate hike, with the implied probability of a 25bps move rising to around 50% from approximately 20% before the data. Pricing further along the policy path also shifted more hawkishly, although to a lesser extent, with around 4bps of additional tightening priced across meetings beyond October through March.

The initial reaction saw Treasury yields surge, particularly at the front end, as participants reassessed the prospects for further Fed tightening. However, the move was gradually unwound throughout the session in a notable turnaround. By settlement, only the 2-year yield remained higher, albeit well off its earlier peak, while the long end had completely reversed its initial post-CPI sell-off.

There was no obvious catalyst for the gradual recovery, although the broader risk tone remained poor, with equities declining throughout the session amid continued pressure on AI-related names. Weakness in memory stocks persisted, while other AI names also came under significant selling pressure. Particular attention was on CoreWeave's corporate bond yield rising above 15%, raising concerns over credit risk and the sustainability of AI-related financing. The equity weakness may have contributed to a flight-to-quality bid in Treasuries, helping offset the initial inflation-driven sell-off.

Elsewhere, Fed officials Goolsbee and Barkin spoke following the CPI release, although neither committed to a decision for the October meeting. Goolsbee expressed disappointment with the inflation report, while Barkin acknowledged that the reading was higher than he would have hoped.

• US sold 17-wk bills at a high rate of 4.195%, B/C 2.79x
• US to sell USD 110bln of 4-week bills and USD 105bln of 8-week bills on October 15th; all to settle October 20th

• Fed Hike Pricing via CME FedWatch: Oct 12.3bps (prev. 5.4bps), Dec 29.8bps (prev. 27.6bps)
• EFFR at 3.88% (prev. 3.88%), volumes at USD 106bln (prev. USD 110bln) on October 13th
• SOFR at 3.89% (prev. 3.87%), volumes at USD 3tln (prev. USD 2.961tln) on October 13th
• NY Fed RRP op demand at 0.20bln (prev. 0.28bln) across 2 counterparties (prev. 1) on October 14th
• NY Fed T-Bill Purchases (1-4 month): Accepts USD 3.89bln of USD 53.98bln offered; Offer-to-cover 13.87x *The US Treasury to buy back up to USD 6bln (prev. 6bln) in 10-20year nominal coupons in operation on Thursday.