Bond yields spike most since tariff meltdown on rate-hike bets

The US bond market experienced a significant drop, with short-term yields surging by the most in 19 months. This occurred after consumer prices rose faster than expected and Federal Reserve officials warned of more aggressive interest rate hikes. Two-year Treasuries, which are more sensitive to Fed moves, saw their yields increase by 17 basis points to 4.73%, the largest jump since the Trump administration's April 2025 tariff rollout.

This marked a reversal for the bond market, which had rallied since early last month amid tech stock declines due to concerns about AI's sustainability. The drop in yields was driven by economic events such as the Democratic sweep in Congressional elections and a decline in oil prices from Middle East tensions. However, these factors were overshadowed by concerns about the Fed's slow approach to containing inflation that has remained above its target since the pandemic.

Fed Governor Christopher Waller's comments about supporting a large rate increase if inflation stays high added to the pressure. The consumer price index showed core prices rising 0.3% month-over-month, exceeding expectations, while overall prices increased 0.4%. This inflation data, combined with the Fed's recent lack of policy guidance, led traders to sell bonds and brace for potential rate hikes.

The 10-year yield, a key benchmark for mortgages and loans, reached 5.02%, indicating weak demand. Economists now anticipate the Fed will raise rates by a quarter point at its upcoming meeting, with a potential for additional hikes, as the market grapples with the possibility of a more aggressive policy stance.