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Bond Report: U.S. 10-year Treasury yield rises to 2% for first time since 2019 with inflation higher than expected

U.S. Treasury yields moved higher Thursday, with the 10-year rate briefly touching 2%, as the U.S. inflation rate beat expectations by climbing to 7.5% for January.

After the data, traders began pricing in a more-than-50% chance of a 50 basis point interest rate hike by the Federal Reserve in March.

What are yields doing?

The yield on the 10-year Treasury note TMUBMUSD10Y, 1.987% was at 1.984%, compared with 1.928% at 3 p.m. Eastern on Wednesday. It briefly hit 2%, a level last seen in 2019.
The 2-year Treasury yield TMUBMUSD02Y, 1.484% was at 1.473% versus 1.346% on Wednesday afternoon.
The yield on the 30-year Treasury bond TMUBMUSD30Y, 2.279% stood at 2.278%, up from 2.232% late Wednesday.

What’s driving the market?

The rate of U.S. inflation climbed to 7.5% last month and stayed at a 40-year high, suggesting the upward pressure on consumer prices is unlikely to relent much anytime soon. The 7.5% surge in the cost of living in the past 12 months is the biggest since February 1982, and exceeded the 7.2% estimate of economists surveyed by The Wall Street Journal.

Read:U.S. inflation rate climbs to 7.5% after another sharp increase in consumer prices

A separate measure of consumer inflation that strips out volatile food and energy prices also rose 0.6% last month, the government said Thursday. Meanwhile, the increase in the so-called core rate over the past 12 months moved to 6% from 5.5%. That’s the highest level since August 1982. 

See: Will hot inflation data kill the stock-market bounce? What investors want to see

Traders responded by raising the likelihood of a half percentage point benchmark interest rate increase from the Federal Reserve to 54% after the report, up from 24% on Wednesday, according to the CME FedWatch Tool.

What do analysts say?

“This latest look at inflation could get the Federal Reserve talking about a potential half-point interest rate hike at their March meeting. The next CPI release will be March 10, just days before the Fed meets and during their ‘quiet period’ which will be too late for them to convey any updated thoughts publicly,” said Greg McBride, chief financial analyst at Bankrate.com.

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