US yields rise ahead of Fed decision, more AI company earnings

By Caroline Valetkevitch

NEW YORK, Oct 28 (Reuters) - US Treasury yields rose on Wednesday ahead of this afternoon's Federal Reserve rate decision, with investors likely to focus on potential future rate hikes.

The Fed is expected to hold interest rates steady when it announces its decision at the end of its meeting today after it raised rates in September for the first time in three years.

Rate futures are showing a roughly 90% probability that the Fed will hold rates steady in its decision at 2 p.m. EDT (1800 GMT), according to CME Group's FedWatch tool. They were showing a more than 75% probability of at least a quarter-point hike in December.

Focus is likely to be on whether inflation is moderating. The US-Israeli war with Iran has caused energy prices to linger at high levels. In addition, strong demand from the AI industry has fueled concerns about inflation.

Bond yields have stabilized recently after a period of rising along with inflation fears, said Adam Sarhan, chief executive of 50 Park Investments in New York.

"That stabilization in bond yields is somewhat encouraging," but investors are still anxious to hear what the Fed says and economic data shows about inflation, he said.

"If inflation starts going down, not up, that's going to be a very welcome sign," he said.

Oil prices were higher on Wednesday after an attack on a refinery in Saudi Arabia, the world's top crude exporter.

September's Personal Consumption Expenditures report, the Fed's preferred inflation gauge, will be released on Thursday.

Bond prices rose, pushing yields lower, last week as concerns about the sustainability of the AI boom triggered a selloff in stocks and made safe-haven bonds more attractive. Meta Platforms META.O, the operator of social media networks and a major AI investor, said last week in its earnings report that it would create a new class of shares in part to raise money for further capital spending. Investors took that as evidence that the next leg of the AI buildout will be costly for shareholders.

The benchmark 10-year yield last Thursday had its biggest one-day drop in nearly four years as stocks dropped. It was higher on Wednesday and just above the 5% mark.

AI-related funding announcements this week have breathed new life into the AI trade. Quarterly results from hyperscalers Microsoft MSFT.O and Alphabet GOOGL.O are due after markets close on Wednesday, with both companies expected to report accelerating cloud growth.

The yield on the benchmark US 10-year Treasury note was up 3.1 basis points at 5.024%. The yield on the 30-year bond rose 1.6 bps to 5.321%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, was up 4.2 bps at 4.779%.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at a positive 24.4 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.475% after closing at 2.469% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.355%, indicating the market sees inflation averaging about 2.4% a year for the next decade.