By Caroline Valetkevitch
NEW YORK, Sept 29 (Reuters) - Two-year US bond yields slipped on Tuesday as investors reduced bets on a Federal Reserve interest rate hike next month following comments by Fed Bank of New York President John Williams, while major stock indexes eased as longer-dated yields held near multi-decade highs.
Optimism over AI lab Anthropic's plan to go public limited the weakness in equities along with Williams' comments.
Williams said he sees "no urgency" for further action after the US
central bank's policy rate increase earlier this month.
Traders now see about a 50-50 chance of quarter-point rate hike at the Fed's upcoming meeting in October, based on pricing of Fed funds futures contracts, down from nearly 70% earlier in the day.
Short-term rate futures contracts are now priced for a single interest-rate hike by year end after Williams said that's what he sees as likely, should the economy play out as he expects.
Still, investors remained anxious about the rate outlook ahead of Wednesday's monthly US personal consumption expenditures price index, with the 30-year US Treasury bond earlier hitting its highest level since June 2002. Also, the monthly US jobs report is due later this week.
"Some investors are preparing for ... the PCE tomorrow. If we should see an acceleration of inflation, that will, I think, cement a rate hike in October and that is part of the fear in the bond market right now," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
Bond yields have been rising sharply in part because of higher oil prices tied to the seven-month-old war in the Middle East and worries about inflation. The Fed raised interest rates earlier this month for the first time since 2023 in an effort to combat higher inflation.
Investors also digested comments from other Fed officials on Tuesday, including Chicago Fed President Austan Goolsbee, who said that allowing inflation to stay above the Fed's target for 5-1/2 years is "playing with fire," noting the Fed may need to respond to a supply shock that has long-lasting effects.
In addition, data showed US consumer confidence dropped to the lowest level in more than 12 years in September, with households expecting both business conditions and the labor market to weaken over the next six months.
The 2-year note yield, which typically moves in step with interest rate expectations for the Fed, was last down 3.51 basis points to 4.889%, after earlier touching 4.9596%, its highest point since May 2024.
The yield on benchmark US 10-year notes was up 1.32 basis points at 5.255%, after earlier touching 5.2932%, its highest level since mid-June 2007.
The 30-year bond yield rose 3 basis points to 5.592%, after hitting its highest level since June 2002 in morning trading.
The Dow Jones Industrial Average fell 131.59 points, or 0.26%, to 51,349.92, the S&P 500 fell 12.85 points, or 0.17%, to 7,670.84 and the Nasdaq Composite fell 22.84 points, or 0.08%, to 26,797.54.
Anthropic's IPO prospectus showed how the AI lab has grown sharply in the last year but has also posted wider losses. The company is targeting a $2 trillion-plus valuation, possibly setting a benchmark for how Wall Street measures AI leaders.
MSCI's gauge of stocks across the globe fell 3.41 points, or 0.30%, to 1,135.86. The pan-European STOXX 600 index fell 0.09%.
Earlier, yields on French 10-year bonds were pinned near 2008 highs at 4.74% and were set for their biggest monthly rise since 2022.
Sovereign yields are an anchor for global markets, a reference price for investing in riskier stocks and a benchmark for mortgages and corporate borrowing. Higher rates pile pressure on government, corporate and household budgets.
OIL FALLS
Oil prices fell as investors focused on signs of recovering crude exports from the Middle East.
Still, oil prices had been rising as hopes that a US-Iran peace deal may be on the horizon have diminished. US President Donald Trump said he has offered Iran nothing to end the war, rejecting media reports that cited US officials saying he was willing to ease sanctions and release frozen funds for "concrete" steps regarding Iran's nuclear program.
US crude futures dropped $3.22 to settle at $89.38 a barrel and Brent futures fell $2.69 to settle at $102.59.
In currencies, the euro was last up 0.01% at $1.1341.Against the Japanese yen, the dollar strengthened 0.03% to 157.32. The Australian dollar was nearly flat versus the greenback at $0.6984.
Earlier, Australia's central bank lifted rates to a 15-year high.
Spot gold rose 1.46% to $4,174.26 an ounce.
(Reporting by Caroline Valetkevitch in New York; Additional reporting by Johann M Cherian in Bengaluru and Tom Westbrook in Singapore; Editing by Thomas Derpinghaus, Andrew Heavens, Aurora Ellis and Sonali Paul)
