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U.S. Treasuries slumped, pushing yields higher, after higher-than-expected inflation data and comments from a key Federal Reserve official fueled bets that the central bank would need to make more aggressive interest rate hikes to curb inflation.
The two-year Treasury yield, which closely tracks expectations for Fed policy, jumped 17 basis points on Tuesday. The two-year yield saw its biggest one-day rise since April 2025, when President Donald Trump’s unveiling of tariffs shook financial markets.
The tough day for bonds began after Fed Governor Chris Waller said in a speech in London that he would consider backing a giant 50 basis point (half-point) rate hike at the U.S. central bank’s policy meeting in December if core inflation – a measure that excludes the volatile food and energy categories – continues to run at 0.3% or higher.
“Then stronger political action may be needed,” he said. “A hike of just 25 basis points (a quarter point) would put our credibility at risk, a risk I am not prepared to take.”
Waller said he wants to monitor the impact of AI development on prices of high-tech products and determine whether rising energy prices this year continue to add to inflationary pressures. Oil prices have fallen in recent days, but remain well above their pre-war levels with Iran.
Consumer price data released Tuesday showed core inflation rose 0.3% from the previous month, more than the 0.2% increase economists had expected. Yields jumped after the data was released.
The key 10-year Treasury yield jumped 10 basis points to 4.98% and briefly topped 5% during trading. The 10-year yield influences the cost of borrowing across the economy, including mortgage rates.
An auction of 10-year bonds on Tuesday led to a drop in demand, which added pressure on the bonds, according to market strategist Peter Boockvar.
Meanwhile, Dallas Fed President Lorie Logan said Tuesday in Houston that the Fed needs to make at least two more quarter-point rate hikes.
“The exact pace of increases could depend on the near-term economic and financial environment,” Logan said. “It may be possible to act more quickly this winter than the (Fed) has done so far this fall.”
Traders now rate 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 a week ago, traders were pricing in a 77% chance of a quarter-point hike and a 23% chance that the Fed would keep rates steady.
“The profile of October’s economic data and a shift in hawkish rhetoric from the Fed have prompted the market to reevaluate whether a faster pace of Fed policy tightening might be warranted,” Vail Hartman, U.S. rates strategist at BMO Capital Markets, wrote in a note.
Stephen Stanley, chief U.S. economist at Santander, said in a note that he remained confident the Fed would raise rates by 25 basis points in December, adding that Waller’s proposal of 50 basis points likely did not represent the consensus view among Fed officials.
“That said, I would also like to note that if inflation data does not show signs of improvement in the coming months, then my expectations of further tightening in 2027 are at risk,” Stanley wrote.
Stocks closed slightly lower on Tuesday. The S&P 500 was down 0.4% and the Nasdaq was down 0.74%. Nvidia shares fell 5.47%, extending a recent period of weakness following concerns over the board’s investigation into reports that CEO Jensen Huang was the “target of a foreign intelligence effort.” Nvidia stock closed at its lowest level since March 30.
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