US yields jump as hot consumer inflation boosts rate hike bets
ANIYields on 2-year Treasuries climbed to their highest levels in more than two weeks after the Labor Department's Bureau of Labor Statistics said the Consumer Price Index rose 0.6% last month after climbing 0.4% in August. In the 12 months through September, the CPI advanced 3.7% compared with economist expectations for 3.6% and a 3.4% increase in August.
And gasoline prices soared 7.1% in September, data from the US Energy Information Administration showed. The data dampened investor confidence that the Fed would decide to keep rates steady at its next meeting, which is in two weeks.
Traders were last pricing in a 53% probability that the Fed would keep rates steady on October 28 compared with 78.4% ahead of the data, according to LSEG data. And bets solidified for a hike at the December meeting with the probability rising to 93% from 87.9% before the data.
"This was a massive upside surprise to CPI," said Mike Lorizio, head of US rates & mortgage trading at Manulife Investment Management, noting that Wednesday's data would impact the Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index.
"It will take forecasts for PCE meaningfully further away from the Fed's 2% target for inflation. This would suggest that the Fed would need to remove some accommodation to properly address the price stability part of its dual mandate," he added.
The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, was up 11 basis points at 4.903% after earlier touching 4.9521%, its highest level since September 29.
The yield on the benchmark US 10-year Treasury note rose 8.3 basis points to 5.3%. The yield on the 30-year bond rose 5.6 basis points to 5.619% after three days of declines.
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 39.4 basis points.
Before the data was released, the Fed's Vice Chair for Supervision Michelle Bowman had said that the US central bank has time to wait and see how financial markets and the economy evolve after the last rate hike before deciding to take any more action.
And late on Tuesday afternoon, Boston Federal Reserve President Susan Collins said that she believed the US central bank will need to raise interest rates again before the end of this year to lower inflation.