Bond yields surge most since 2022 on hawkish Fed repricing
The policy-sensitive 2-year Treasury yield surged 38.8 basis points over four sessions, its biggest jump since 2022.
Bond yields have recorded their largest surge since 2022. The policy-sensitive two-year Treasury yield climbed 38.8 basis points over four sessions to reach 4.862%.
This dramatic move reflects a rapid reassessment of the Federal Reserve's policy trajectory. Traders are now pricing in a 91% probability of a quarter-point rate hike in December, with a 9% chance of a larger half-point increase. Just one week earlier, markets saw a 23% chance the Fed would hold rates steady. The expected terminal policy rate has also shifted higher.
Market pricing reflects heightened Fed tightening expectations
The shift is stark. Market expectations have moved from contemplating a pause to nearly fully pricing in a December hike, with some betting on a more aggressive move.
| Metric | Current Pricing | Pricing One Week Ago |
|---|---|---|
| Chance of 0.25% hike in December | 91% | 77% |
| Chance of 0.50% hike in December | 9% | Not priced |
| Chance of holding steady | 0% | 23% |
Analyst Gennadiy Goldberg noted the shift, stating, "This is really just a function of the market repricing Fed expectations, and a more hawkish Fed in the months to come."
Inflation data fuels further tightening concerns
Recent economic data has supported the case for continued tightening. Core inflation rose 0.3% from a month earlier, exceeding expectations of a 0.2% increase. This figure carries particular weight. Fed Governor Chris Waller has said he would consider backing a 50 basis point hike in December if core inflation reached 0.3% or higher.
Fed officials signal continued tightening path
Officials have reinforced the hawkish message. Waller has publicly suggested a half-percentage-point increase might be warranted. Dallas Fed President Lorie Logan said the central bank needs to deliver at least two additional quarter-point rate increases. These comments contributed to a volatile session where the key 10-year Treasury yield jumped 10 basis points to 4.98%, briefly rising above 5%.
The current cycle has been aggressive. Hikes that began in early 2022 pushed the upper limit of the Fed’s policy range to as high as 5.5% in 2023 and 2024.
Market volatility impacts equities and tech stocks
Equity markets felt the pressure from rising yields. Major indices ended the session lower. The S&P 500 declined by 0.4%, while the Nasdaq Composite ticked down by 0.74%. The Dow Jones Industrial Average fell 0.36%.
Technology stocks were notably affected. Nvidia shares fell sharply, closing at their lowest level since late March after news of its CEO's resignation. The stock dropped 5.47% on the day. The market now prices a 91% chance of a quarter-point Fed rate hike in December.
