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.
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.
See: Hot U.S. inflation is boosting market expectations for a 5% or higher fed-funds rate in a matter of months
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.
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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.”