U.S. yields jump after hotter-than-expected inflation data
Consumer price inflation above economists’ expectations in October
U.S. Treasury yields jumped on Tuesday after data showed that U.S. consumer prices rose more than economists expected in October, leading traders to bolster bets on a larger interest rate hike at the Federal Reserve’s December meeting.
The Consumer Price Index rose 0.4 per cent last month after advancing 0.6 per cent in September, while core prices, which exclude the volatile food and energy components, increased 0.3 per cent last month, matching September’s gain.
Fed funds futures traders are now pricing in a hike of 29 basis points at the Fed’s December 8-9 meeting, indicating rising expectations that the Fed could make a larger-than-usual 50 basis point increase. The Fed more typically hikes or cuts rates in 25 basis point increments.
The data follows comments from Fed Governor Christopher Waller that the U.S. central bank ought to raise short-term borrowing costs in December even if data shows inflation cooled last month. He added that it should consider an upsized half-point rate hike if the inflation picture worsens.
If core consumer prices rise 0.3 per cent or more from September, “a stronger policy move may be needed,” Waller said. “In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting.”
“There was a one-two punch, with Waller saying he was inclined to support a hike next month and even throwing out the idea of a 50 basis point hike,” said Will Compernolle, macro strategist at FHN Financial.
The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last up 19.28 basis points at 4.74 per cent, the highest since October 28. It is on track for its biggest one-day jump since the April 2025 “tariff tantrum,” when U.S. President Donald Trump announced trade levies on imports from around the world.
The yield on benchmark U.S. 10-year notes rose 12.97 basis points to 4.992 per cent, the highest since October 29. It is headed for its largest daily increase since September 23.
The closely watched yield curve between two- and 10-year notes was last at 25 basis points, after earlier reaching 23 basis points, the flattest level since September 24.
Traders have increased bets on further rate hikes as the growth outlook stays strong, supported by investment in AI, while inflation is nearing 6 years of being above the Fed’s 2 per cent annual target.
“Today’s inflation report is a warning shot. A December hike now looks locked in, with the upside surprise extending well beyond energy and into both core goods and services,” said Seema Shah, chief global strategist at Principal Asset Management.
Producer price inflation data for October is also due on Friday.
The Treasury will sell US$42-billion in 10-year notes on Tuesday, the second sale of US$125-billion in coupon-bearing debt this week. There was mixed demand for a US$58 billion sale of 3-year notes on Monday and the U.S. government will auction US$25-billion in 30-year bonds on Thursday.
The U.S. bond market will be closed on Wednesday for the Veterans Day holiday.