NEW YORK: The US bond market tumbled, sending short-term yields surging by the most in 19 months, after consumer prices rose at a faster-than-expected pace and Federal Reserve (Fed) officials warned the central bank may need to increase interest rates more aggressively.
The decline drove yields on two-year treasuries, which are more sensitive to the Fed’s moves than longer-dated bonds, up by 17 basis points to 4.73%, the biggest jump since President Donald Trump’s April 2025 tariff rollout unleashed a global meltdown.
It marked another jarring reversal for the bond market, which had rallied strongly since early last month as tech stocks slipped on worries about the sustainability of the artificial intelligence boom.
Treasuries received another boost last week when the Democratic sweep in the Congressional elections spurred a sharp drop in stock prices and oil slid on hopes the US-Israeli war on Iran war would draw to an end.
But both those drivers were swept aside on Tuesday, when the focus swung back to concern that the Fed is moving too slowly to contain inflation that’s exceeded its target since the pandemic and has accelerated since the Middle East oil shock.
“Inflation isn’t moving closer to the Fed’s target,” said George Catrambone, head of fixed income at DWS Americas.
“The market is flagging there’s a tail risk of a 50-basis-point hike” at the next meeting in December, he said.
“Equities, specifically the technology sector, has taken notice and will continue to tighten financial conditions amid more aggressive Fed rhetoric.”
A supersized move
The selling pressure began after Fed governor Christopher Waller, during an appearance in London, said that he would support an unusually large half-percentage-point rate increase if inflation continued to accelerate.
When the consumer price index figures came in above economists’ forecasts, traders dumped bonds and started bracing for the possibility of such a supersized move next month.
The speculation drew further support from Dallas Fed president Lorie Logan, who said the Fed may need to start moving at a quicker pace.
The Fed has raised its benchmark rate just once, by a quarter-point in September, since Kevin Warsh took over as chairman earlier this year and it remained on hold at last month’s meeting.
While Warsh has repeatedly stressed the need to rein in inflation, he has ditched his predecessors’ policy of providing forward guidance to the market, which has left traders leaning heavily on incoming data and comments from other officials.
The inflation pressures were highlighted by the consumer price index, whose core measure, which excludes volatile food and energy costs, rose 0.3% from a month earlier, according to Bureau of Labour Statistics data, while overall prices climbed 0.4%.
Both were larger increases than economists predicted and followed a labour market report last Friday that showed unexpected wage growth as employers added a significant number of workers to their payrolls.
Bloomberg strategist Tatiana Darie said that Tuesday’s jump in treasury yields is “shaping up to be among the largest spike seen in recent years if it holds”, underscoring an abrupt repricing of the Fed outlook after hawkish commentary from policymakers.
“Should the moves extend, they threaten a renewed bout of volatility in equities as risk sentiment remains fragile after last week’s steep tech rout.”
Renewed inflation pressures
The surge in yields erased some of the gains Treasury markets had made since early October, when yields climbed to their highest level in more than 20 years.
That sell-off was driven by renewed inflation pressures, concerns over the Fed’s inflation-fighting resolve and worries about the growing US fiscal deficit.
The 10-year yield, a key benchmark for the cost of mortgages and other types of loans, pushed back over 5% after climbing as much as 14 basis points, before slightly paring the rise by the end of the trading day.
At an auction on Tuesday, the securities were sold at a yield of 5.02%, above where they had been trading, in a sign of weak demand.
Traders are now pricing in that the Fed is certain to raise rates by a quarter-point at its meeting next month, with some chance of an even larger move. Futures are baking in about three quarter-point hikes by June.
“The Fed skipped a hike in 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,” Mizuho added. — Bloomberg
