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Bond Report: 2-year Treasury yield hits fresh 15-year high of almost 4.5% after September CPI comes in hot


Treasury yields jumped on Thursday, sending the policy-sensitive 2-year rate to its highest since August 2007, after September’s U.S. consumer-price index came in hot and increasing the chances of another 75-basis-point rate hike by the Federal Reserve next month.

What yields are doing

The yield on the 2-year Treasury note

rose 16.2 basis points to 4.449% from 4.287% at 3 p.m. Eastern on Wednesday. Thursday’s level is the highest since Aug. 9, 2007, based on 3 p.m. data from Dow Jones Market Data.

The 10-year Treasury note yield

advanced 5 basis points to 3.952% after factoring in reopening levels. Thursday’s level is the highest since Sept. 27.

The 30-year Treasury bond yield

rose 4.7 basis points to 3.933% from 3.886% late Wednesday. Thursday’s level is the highest since Jan. 3, 2014.

The spread between the 2- and 10-year yields briefly shrank to as little as minus 59 basis points in an ominous sign about the economic outlook.

Market drivers

The latest reading on the U.S. consumer-price index for September confirmed that inflation is showing little signs of letting up. Though the year-over-year rate of inflation slipped to 8.2% from 8.3%, the cost of living rose 0.4% in September, more than the 0.3% rise expected by economists surveyed by The Wall Street Journal.

And the so-called core rate of inflation that omits food and energy prices jumped a sharp 0.6%, above Wall Street’s forecast for a 0.4% gain. The increase in the core rate over the past year also climbed to a new peak of 6.6% from 6.3%, marking the biggest gain in 40 years.

Fed funds futures traders priced in a 98.6% chance that the  Federal Reserve will lift its main interest-rate target by 75 basis points, or three-quarters of a percentage point, to a range of 3.75% to 4% on Nov. 2, up from 84.5% on Wednesday, according to the CME FedWatch tool. A 1.4% chance of a 100 basis point hike was also seen.

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Meanwhile, concerns about liquidity in the U.S. Treasury market were underscored Wednesday by U.S. Treasury Secretary Janet Yellen.

“We are worried about a loss of adequate liquidity in the market,” Yellen said Wednesday in response to questions following a speech in Washington, according to news reports. Yellen said the balance-sheet capacity of broker-dealers to engage in market-making in the Treasury market hasn’t expanded much, while the overall supply of Treasurys has increased.

Related: The next financial crisis may already be brewing — but not where investors might expect

The Treasury Department’s $18 billion 30-year bond reopening on Thursday produced “average results,” according to Jefferies economists.

What analysts say

“CPI remains too sticky and coming down much too slowly: 8.2% vs. 8.1% expected,” said  Jan Szilagyi, CEO and co-founder of investment research firm Toggle AI.

“This is [the] Fed’s nightmare scenario: the risk that inflation stays entrenched because services inflation is far harder to bring down than energy inflation,” Szilagyi said. “The Fed will see this as a license to stay aggressive while the labor markets remain strong and the public tolerates rate hikes. More than that, they will maintain a hawkish message to avoid [the] perception that they are tiptoeing around the issue.”

MarketWatch 25 Years: ‘Soft landing’ unlikely as Fed tries to get grip on inflation, says former Treasury Secretary Robert Rubin

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