Treasury yields rose and the yield curve inversion widened on Tuesday after U.S. consumer prices unexpectedly rose in August, signaling to the market that the Federal Reserve will take more decisive action against inflation.
* Two-year note yields, which typically reflect interest rate expectations, jumped to a new 14-year high of 3.783% in a move that widened the spread with benchmark 10-year notes.
* Market rates were falling ahead of the Consumer Price Index report on expectations that headline inflation had peaked and that while the Fed was expected to hike another 75 basis points next week, it would soon change its bias.
* The CPI rose 0.1% last month, after being unchanged in July, while in the 12 months to August it rose 8.3%. Economists polled by Reuters had forecast monthly CPI falling 0.1% and year-on-year rising 8.1%.
* “Inflation is public enemy No. 1 for the Fed and I think this number puts pressure on them to keep going,” said Priya Misra of TD Securities. “We got a pretty aggressive message at the Fed meeting in September, and that’s what the market is pricing in if you look at the huge rate hike move today.”
* The Fed’s final rate could rise to more than 4% before rates start to fall, he said. Before Tuesday, the market expected it to be around 3.75%, if not lower.
* Nomura said in a note that he expects a final rate of between 4.50% and 4.75% in February.
* Fed funds futures see a 25% chance of a 100 basis point (bp) rate hike at the end of the September 20-21 meeting of monetary authorities.
* Misra doubts the Fed will go that high, but said a 75bp hike in November is possible.
* The 10-year bond yield gained 5.9 basis points to 3.422%, while the spread between the return on two-year and 10-year debt, seen as a harbinger of recession, stood at -33.6 points basics, compared to -21.6 on Monday.