By Daniel Kruger
U.S. government-bond yields posted their biggest one-day fall in more than four months Thursday as stocks tumbled after the Labor Department said inflation slowed in September.
The yield on the benchmark 10-year Treasury note fell to 3.131%, its biggest single-day decline since May 29, from 3.221% Wednesday. Yields fall as bond prices rise.
Yields fell after the Labor Department said Thursday that the consumer-price index rose 0.1% in September. Economists surveyed by The Wall Street Journal expected consumer prices to climb 0.2%.
The muted reading suggests that the Fed might not feel pressure to speed up its pace of interest-rate increases, analysts said. A slower pace of inflation helps support bond prices because it helps maintain the future purchasing power of the debt's fixed principal and interest payments.
With inflation remaining "quite contained," Fed officials "should be pretty pleased with the result," of their policy of gradually raising interest rates, said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. "It's the bond traders who haven't managed the shift from a deflationary kind of environment to a more normalized kind of environment."
Yields extended their fall Thursday as stocks posted a second day of sharp declines, following the Dow Jones Industrial Average's largest one-day drop since February.
"We're just following the stock market," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia. The recent rise in bond yields helped propel this week's decline in stock prices, which was "an overreaction." Mr. Comiskey said. "People are surprised because they haven't seen yields rise like this in a while,' he said.
Investors early Thursday scaled back bets that the Federal Reserve will take an aggressive approach to raising interest rates in the coming year, after the release of the inflation data. Policy makers penciled in one more rate increase at their meeting in September and three increases for 2019.
Fed funds futures, which investors use to bet on the path of central-bank interest-rate policy, showed that the chances that policy makers will raise rates three times by June 2019 declined late Thursday after the inflation report to 32% from 41% Wednesday. Should the Fed raise rates at that pace, it would represent a continuation of its policy of boosting its target rate once each quarter.
Write to Daniel Kruger at Daniel.Kruger@wsj.com