Key Highlights

● The probability of a Fed hike on October 28 fell to a low level.

● The 10-year yield posted its biggest one-day drop since August 1, 2025, per some data.

● Homebuilders such as Lennar jumped as yields fell.

● Initial jobless claims fell to 194,000, the fewest in about three months.

Bets that the Federal Reserve will raise interest rates at next week's meeting faded on Thursday, October 22, as a powerful rally in Treasuries pulled yields sharply lower. The probability of a hike at the October 28 decision fell to a low level, and reports said markets were overwhelmingly pricing a hold as of Thursday evening.

Expectations have not vanished entirely. Markets still price in about one more increase before the end of the year, after the Fed raised rates in September, its only hike so far this year.

The bond rally behind the shift

The move in rate expectations followed a dramatic day in the bond market. The 10-year Treasury yield closed back below a closely watched threshold for the first time since September 22 and posted its biggest one-day drop since August 1, 2025, according to several data providers. Others dated the milestone back to March 2023.

The two-year yield, which tracks expectations for Fed policy most closely, fell sharply. The five-year yield also dropped steeply.

"Treasuries rallied overnight as tech stocks came under pressure amid renewed AI valuation fears," a rates strategist said.

Stocks stumble, bonds benefit

The flight to bonds came as AI and chip stocks tumbled. Meta Platforms (NASDAQ:META) set 2026 capital spending at $135 billion to $145 billion and reported negative free cash flow, and Lam Research (NASDAQ:LRCX) warned of supply constraints. The Nasdaq Composite sank 694.00 points, its steepest drop since June 5, and the S&P 500 fell 93.74 points to its worst close since July.

A sharp drop in stocks can tighten financial conditions on its own, which can reduce pressure on the central bank to raise rates. Investors also questioned the financing of the AI boom: credit default swaps on Meta hit a record, and CoreWeave (NASDAQ:CRWV) tumbled to a 17-month low amid concerns about its funding needs.

Arguments on both sides

Not all of Thursday's news pointed toward a softer Fed. Initial jobless claims fell to 194,000 for the week ended October 17, below the 200,000 expected and the fewest in about three months, a sign of a firm labor market.

Oil prices also kept rising. Brent crude climbed to $113.17, its highest since May 4, after Houthi attacks in Saudi Arabia. Procter & Gamble (NYSE:PG) flagged a $1.4 billion after-tax commodity headwind, and Southwest Airlines (NYSE:LUV) cut its 2026 profit outlook on higher fuel costs.

Even so, bond traders looked past the inflation risk. "If oil is about to spark an inflation wave, the bond market hasn't heard about it," one market commentator said.

Fed in blackout

The Fed itself offered no guidance. Policymakers are in their blackout period ahead of the October 27 and 28 meeting, and Fed officials were not heard speaking on Thursday. Chair Kevin Warsh said at an earlier International Monetary Fund meeting in Bangkok: "I don't prejudge meetings."

Rate-sensitive stocks welcomed the shift. Homebuilders such as Lennar (NYSE:LEN) jumped, Home Depot (NYSE:HD) rose to $327.73, and Freddie Mac's 30-year mortgage rate eased from the prior week.

Events that could revive hike bets

The Fed announces its decision on October 28. Before then, Friday brings S&P Global purchasing managers' surveys and the final University of Michigan sentiment reading, which includes inflation expectations. Third-quarter GDP and September PCE inflation arrive on October 29, the day after the decision. A rebound in tech stocks or a further surge in oil could quickly revive hike bets, while continued market stress would likely keep them subdued.