US Treasuries experienced a decline, resulting in a significant increase in yields, following inflation data that exceeded expectations and remarks from a prominent Federal Reserve official. These developments intensified speculation that the central bank would be required to implement more forceful interest rate increases to mitigate inflationary pressures. The two-year Treasury yield, which closely aligns with expectations for Fed policy, increased by 17 basis points on Tuesday. The two-year yield experienced its most significant single-day increase since April 2025, a period marked by President Donald Trump’s announcement of tariffs that unsettled financial markets.
The challenging day for bonds commenced following comments from Fed Governor Chris Waller in London, where he indicated he might support a substantial rate increase of 50 basis points at the US central bank’s December policy meeting, contingent upon core inflation remaining at 0.3% or above, a figure that excludes the more erratic categories of food and energy. “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 expressed his intention to observe the effects of the AI expansion on the pricing of high-tech products, as well as to assess whether the increase in energy prices this year is perpetuating inflationary pressures. Oil prices have experienced a decline in recent days; however, they continue to be significantly elevated compared to their levels prior to the Iran conflict. Consumer price data released Tuesday indicated that core inflation increased by 0.3% from the previous month, surpassing the 0.2% rise anticipated by economists. Yields experienced a notable increase following the release of the data.
The key 10-year Treasury yield increased by 10 basis points to 4.98% and briefly surpassed 5% during trading. The 10-year yield significantly impacts borrowing costs throughout the economy, particularly in relation to mortgage rates. An auction of 10-year notes on Tuesday experienced weak demand, as noted by Peter Boockvar, which contributes to the ongoing pressure on bonds. Meanwhile, Dallas Fed President Lorie Logan stated in remarks in Houston on Tuesday that the Fed must implement at least two more 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.” Market participants are currently assigning a 91% probability to a quarter-point rate increase and a 9% probability to a half-point increase in December, as indicated by CME FedWatch. Just one week ago, traders were assigning a 77% probability to a quarter-point hike and a 23% probability to the Fed maintaining current rates.
“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 wrote in a note. Stephen Stanley stated in a note that he remains convinced the Fed will increase rates by 25 basis points in December, noting that Waller’s consideration of 50 basis points likely does not reflect 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.
