Bond Yields End Higher After Wild Session, Lifted By Inflation Data

A wild day of bond-market swings left Treasury yields higher Thursday, reflecting investors’ bets that the latest hot inflation report would push the Federal Reserve to raise interest rates more than previously anticipated.

Yields, which rise when bond prices fall, initially surged toward new multiyear highs after the inflation data, threatening a dramatic break from their recent trading range. Bonds rallied with stocks later in the session, eroding some of the climb. But, unlike stocks, they failed to recoup all of their price declines.

As has often happened this year, yields rose most sharply on short-term bonds, which are particularly sensitive to the near-term interest-rate outlook. But they also climbed on longer-term Treasurys, which tend to have a larger impact on the financial markets and the economy.

Taken together, Thursday’s moves in stocks, bonds and currencies were difficult to understand, said Zach Griffiths, a senior strategist at the research firm CreditSights. They provided more evidence, he added, of “just how volatile markets are and how difficult [they are] to navigate.”

Still, he said, Treasury yields, on their own, did tell a coherent story—with rising short-term yields driven by bets on higher rates and the less-rapid increase in longer-term yields reflecting a “recognition that recession risks are rising.”

At one point Thursday, the yield on the benchmark 10-year Treasury note reached as high as 4.073%—on track for its first close at 4% or higher since 2008, according to Tradeweb. It eventually settled at 3.952%, still up from 3.901% Wednesday and around 3.85% Thursday morning just before the Labor Department released its latest consumer-price index data.

Once again, that data was disappointing to investors. Coming into Thursday, investors had hoped to see a cooling in so-called core inflation, which excludes volatile food and energy categories. Instead, those prices rose 0.6% in September from the previous month—above the forecast of economists surveyed by The Wall Street Journal, who had expected a gain of 0.4%.

Treasury yields are largely determined by what investors expect interest rates set by the Fed will be over the life of a bond. They, in turn, set a floor on borrowing costs across the economy, with rising yields pushing up rates on everything from mortgages to corporate bonds.

Interest-rate derivatives on Thursday showed that investors have essentially no doubt that the Fed will raise rates by at least another 0.75 percentage point at its next meeting in early November. They also showed the chances of a 0.75 percentage point increase in December rising to about 60% to 70% from less than 35% on Wednesday.

The inflation report caught bond investors at a vulnerable moment. Hammered all year by domestic inflation and the Fed’s response, Treasurys have encountered new threats in recent weeks from overseas developments. In particular, they were hurt by volatility in the U.K. bond market stemming from investors’ concerns about recently released tax-cut plans in that country.

They have also been generally weighed down by actions taken by global central banks to both fight inflation and support their local currencies. Many central banks have aggressively raised interest rates. Some in Asia have also intervened in foreign-exchange markets, raising concerns among investors that they might be selling U.S. Treasurys in the process.

Complicating matters on Thursday, Treasurys got some support from overseas events. Most notably, U.K. bonds staged a major rally in response to speculation that the U.K. government might reverse some of its new budget policies. That, analysts said, helped drag down Treasury yields overnight and mitigated their climb after the inflation data.

The 10-year yield has briefly inched above 4% in a couple of overnight trading sessions in recent weeks. But it has yet to settle above that threshold.

The yield has climbed from 1.496% at the end of last year and 3.131% at the end of August, contributing to deeply negative returns for investors across a range of asset classes.