Treasuries sank and traders solidified their bets that Federal Reserve officials will raise interest rates when they next meet in December after evidence of persistently hot US inflation.
The declines sent yields on two-year Treasuries, which are more sensitive to the Fed's path than longer-dated peers, higher by as much as 18 basis points to 4.74% on Tuesday — on pace for the biggest one-day move since April 2025. Traders added to bets on at least two rate hikes by the middle of 2027 and started to price in a small chance of a jumbo-sized half-point move in December.
Earlier, they'd fully priced in expectations for a quarter-point increase in December after Fed Governor Christopher Waller said in London that he supported a rate increase and that he'd favor a half-point hike if inflation continued to accelerate.
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“Clearly, the 50 basis point hike is on the table for discussion,” Tiffany Wilding, an economist at Pacific Investment Management Co., said on Bloomberg TV.
The consumer price index, excluding food and energy, rose 0.3% from a month earlier, according to Bureau of Labor Statistics data. Overall prices climbed 0.4%. The BLS didn't publish year-over-year changes because data collection was interrupted last October during the government shutdown. It follows a reading of the labor market on Friday that highlighted solid hiring trends and an unexpected jump in wage growth.
Traders saw both reports as supportive for higher US interest rates after policymakers opted for a quarter-point increase in September and then left rates steady in October. The 10-year note was ten basis points higher at 4.98% ahead of the Treasury's auction of a $42 billion new issue at 1 p.m. New York time.
“The Fed skipped October and now will probably need to do some make up,” Alex Pelle, senior US economist at Mizuho, said. The “debate will likely be between 25 versus 50 basis points at the December meeting, not zero versus 25.”
Waller's remarks in a speech in London before the US data had given markets an early taste of the session. He flagged the potential for a hot report — specifically, one that showed core CPI inflation around 0.3% or higher — as a reason that he'd believe that a 50-basis-point move should be considered in December. That guidance prompted investors to pull short-end yields some five basis points higher in early trading, ahead of the data.
Waller kick off a busy run of speeches from other Fed officials this week, including New Fed President John Williams on Thursday and Vice Chair Philip Jefferson on Friday. Traders will scour those appearances for any more guidance on the Fed's path even though Chairman Kevin Warsh has repeatedly said the central bank shouldn't provide that sort of communication.
“December looks to be a go at this point,” said Eric Souza, senior portfolio manager at Capital Advisors Group Inc. “It will be interesting to see if Williams and/or Jefferson come out in the coming days and try and talk back the 50 basis point comment from Waller.”
Traders were pricing in a total of 29 basis points worth of tightening for the December meeting in the swaps market — implying just about 16% chances that officials opt for an outsize move.
“Today's inflation report is a warning shot,” said Seema Shah, chief global strategist at Principal Asset Management. “The message for the Fed is uncomfortable but clear: The inflation fight is not finished.”
She said the Fed was “not there yet” in terms of a jumbo hike next month as “an outsized move should require evidence that inflation is accelerating decisively, expectations are becoming unanchored or the economy is overheating.”
As short-dated yields surged and expectations strengthened for more Fed tightening, the dollar rose almost 0.5% on Tuesday. To Alex Cohen, a strategist at the Bank of America, the CPI report and recent jobs data offered upside for the dollar, even though it remains vulnerable to oil prices and uncertain AI sentiment.
US government bonds have recovered some of the year's losses tied to concerns that the war in Iran and elevated energy costs would keep inflation sticky. After registering multi-decade peaks in early October, the market has benefited from its reputation as a haven. A Democratic sweep in the midterm elections intensified angst around the sustainability of spending on artificial intelligence infrastructure, leading to a selloff in the stock market and a dash for safety.
“The AI tech trade has to settle down, and once that happens, you can make a very strong case that this plunge in yields by 50 basis points over the past month was really just safe haven demand,” said Kevin Flanagan, head of investment strategy at WisdomTree. “If you look at what has occurred in terms of the economic data, it would suggest that we could see yields rise — and perhaps back to 5% for the 10-year.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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