US Treasuries plunged, with short-term yields posting their largest increase in 19 months, driven on one side by consumer prices rising faster than expected and on the other by a Federal Reserve official indicating that a more aggressive rate hike may be necessary.
The yield on the two-year Treasury note, which is more sensitive to Fed policy moves, surged 17 basis points to 4.73%, the biggest jump since US President Donald Trump imposed blanket tariffs in April 2025.
This marks another dramatic reversal in the bond market. Not long ago, concerns about the sustainability of the artificial intelligence boom weighed on tech stocks and also fueled a strong bond market rally since early last month. Last week, the Democrats' landslide victory in congressional elections caused stock prices to plummet, while hopes for an end to the US-Iran war also pressured oil prices, providing further support to US Treasuries.
But on Tuesday, investors put both of those factors behind them, shifting their attention back to concerns that the Fed is moving too slowly to fight inflation. "Inflation is not moving toward the Fed's target," said George Catrambone, head of fixed income at DWS Americas. "The market is flashing a warning about the risk of a 50 basis point hike at the next meeting in December," he said. "The market, especially the tech sector, has taken notice and will continue to tighten financial conditions amid more aggressive Fed rhetoric."
After Fed Governor Christopher Waller said in London that he would lean toward supporting a 50 basis point rate hike if inflation continues to accelerate, in order to preserve the central bank's credibility, the market fully priced in expectations for a 25 basis point rate increase in December. Remarks by Dallas Fed President Logan further reinforced that expectation. She said at least two more 25 basis point hikes are needed, and the Fed may need to start picking up the pace. After tightening policy in September, the Fed held rates steady last month while continuing to assess economic conditions. Chair Kevin Warsh has repeatedly stressed the need to curb inflation that has remained above the Fed's 2% target since the end of the pandemic. However, he has abandoned his predecessor's practice of providing forward guidance to the market, leaving traders more reliant on the latest economic data and other officials' comments to gauge the rate path.
PIMCO economists: US Bureau of Labor Statistics data showed that excluding volatile food and energy costs, core CPI rose 0.3% month-over-month in October, while headline CPI rose 0.4%. Both figures came in above economist expectations. The nonfarm payrolls report released last Friday showed solid hiring trends and an unexpected acceleration in wage growth.
Strategist Tatiana Darie's view: If Tuesday's Treasury yield rally holds, it will rank among the largest in recent years, with the market suddenly repricing the policy outlook after hawkish comments from Fed officials. If this move persists, it could trigger a new round of market volatility, as risk appetite remains fragile after last week's tech stock selloff. Traders now widely expect the Fed to raise rates by 25 basis points at next month's meeting, but some believe the move could be larger. The market has priced in as many as three total 25 basis point hikes by the end of June next year.
"The Fed stood pat in October and may now need to do some catching up," said Alex Pelle, senior US economist at Mizuho. "The debate at the December meeting is likely to be whether to hike 25 basis points or 50 basis points, rather than whether to hold or hike 25 basis points."
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