Bond yields surge most in 19 months as traders brace for Fed rate hikes

US Treasuries slumped, pushing yields sharply higher, after hotter-than-expected inflation data and comments from a key Federal Reserve official fueled bets that the central bank would need to deliver more aggressive interest rate hikes to cool inflation. The two-year Treasury yield, which closely tracks expectations for Fed policy, surged 17 basis points on Tuesday. The two-year yield saw its biggest single-day jump since April 2025, when President Donald Trump’s unveiling of tariffs rocked financial markets. The rocky day for bonds started after Fed Governor Chris Waller said during remarks in London that he would consider backing a jumbo rate hike of 50 basis points (a half point) at the US central bank’s December policy meeting if core inflation – a measure that strips out the volatile categories of food and energy – continues to come in at 0.3% or higher. “Then, a stronger policy move may be needed,” he said. “Hiking only 25 basis points [a quarter point] would put our credibility at risk, a risk I am not eager to take.” Waller said he wants to monitor how the AI buildout is impacting prices of high-tech goods, and if the rise in energy prices this year is continuing to add to inflationary pressures. Oil prices have dropped in recent days, but remain well-above their pre-Iran war levels. Consumer price data released Tuesday showed core inflation rose 0.3% from a month earlier, more than the 0.2% increase economists had expected. Yields surged higher after the data release. The key 10-year Treasury yield jumped 10 basis points to 4.98% and briefly rose above 5% during trading. The 10-year yield influences the cost of borrowing across the economy, most notably mortgage rates. An auction of 10-year notes on Tuesday saw soft demand, according to market strategist Peter Boockvar, adding to pressure on bonds. Meanwhile, Dallas Fed President Lorie Logan said in remarks in Houston on Tuesday that the Fed needs to deliver at least two additional quarter-point rate increases. “The exact pace of increases could depend on the near-term economic and financial environment,” Logan said. “It may be possible to move more rapidly this winter than the [Fed] has moved so far this fall.” Traders are now pricing in a 91% chance of a quarter-point rate hike and a 9% chance of a half-point rate hike in December, according to CME FedWatch. Just one week ago, traders were pricing in a 77% chance of a quarter-point hike and a 23% chance of the Fed holding rates steady. “October’s economic data profile and a hawkish shift in Fed-speak have prompted the market to reassess whether a faster pace of Fed policy tightening may be warranted,” Vail Hartman, US rates strategist at BMO Capital Markets, wrote in a note. Stephen Stanley, chief US economist at Santander, said in a note that he remains convinced the Fed will hike rates by 25 basis points in December, adding that Waller’s consideration of 50 basis points likely doesn’t represent the consensus view among Fed officials. “Having said that, I would also note that if the inflation data do not show signs of improvement in the coming months, then my expectation of no further tightening in 2027 is in jeopardy,” Stanley wrote. Stocks closed slightly lower Tuesday. The S&P 500 was down 0.4% and the Nasdaq ticked down by 0.74%. Nvidia shares fell 5.47%, extending a recent bout of weakness over concerns about the board’s investigation into reports CEO Jensen Huang was the “target of a foreign intelligence effort.” Nvidia shares closed at their lowest level since March 30.