Bonds Slump as Inflation Surge Fuels Bets on 100-Basis-Point Fed Rate Hike

Ye Xie and Liz Capo McCormick, Bloomberg News

The U.S. Treasury building in Washington, D.C., U.S., on Sunday, Dec. 19, 2021. The Treasury's top official for financial oversight said government regulators need action from lawmakers to adequately protect investors, and the wider financial system, from risks posed by stablecoins. Photographer: Samuel Corum/Bloomberg , Bloomberg

(Bloomberg) -- US Treasury yields jumped led by short-dated tenors as another hotter-than-expected inflation report kindled bets that the Federal Reserve could raise rates by a full percentage point this month.

Two-year note yields, already higher than 10-year yields on the view that Fed rate hikes could tank the economy, pulled further away, inverting that segment of the yield curve by as much as 16 basis points, the most since 2007.

The Consumer Price Index rose 9.1% from a year earlier, the largest gain since 1981, Labor Department data showed. The inflation gauge increased 1.3% during the month, the most since 2005, reflecting higher gasoline, shelter and food costs. Economists projected a 1.1% monthly increase and an 8.8% year-on-year change, based on the Bloomberg survey medians.

“The headline data is going to be extremely problematic for the Fed messaging and is going to linger for an extended period,” said David Robin, a strategist at TJM Institutional Services. “A 75-basis-point hike is certain in July and now 75 basis points again becomes an increased certainty in September as the Fed falls further and further behind the curve.”

The Fed raised its policy rate by 75 basis points in June, the biggest increase since 1994. Another three-quarter-point increase in July was already priced into swap contracts before the CPI data; afterward, the contracts priced in about a one-in-three chance of a 100-basis-point hike.

Two-year yields climbed as much as 16 basis points to about 3.21%, while 10-year yields rose nearly 10 basis points to 3.07%. Yield curve inversions are regarded as a harbinger of economic weakness that could eventually result in rate cuts.