Yield on 2-year Treasury bills explodes above 3.79%, highest since 2007

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U.S. Treasury yields rose on Tuesday as investors bet a lofty inflation reading will keep the Federal Reserve aggressive in tightening monetary policy.

The 2-year Treasury yield, the part of the curve most sensitive to Fed policy, jumped more than 17 basis points to 3.748%. The yield rose to 3.794% at one point, its highest level since November 2007. Yields move inversely to prices, and one basis point equals 0.01%.

Meanwhile, the yield on the benchmark 10-year Treasury jumped 6 basis points, trading at 3.42%. The 30-year Treasury bond yield rose for most of the day before slipping 2 basis points to 3.492%.

The consumer price index rose 0.1% for the month and 8.3% over the past year. Economists expected headline inflation to fall 0.1% month-on-month, according to Dow Jones estimates. The year-over-year estimate was 8%.

Energy prices fell 5% during the month, led by a 10.6% drop in the gasoline index. However, these declines were offset by increases elsewhere.

“We’ve seen this showdown between goods moderating and services staying strong. It’s not a showdown. They’ve both moved up,” said Nomura economist Rob Dent. “Right now, I think the Fed is going to be looking at this with great concern. That’s not good news in this report,” he said.

Following the hot inflation reading, markets are pricing a 100% chance that the Federal Reserve will raise interest rates by at least 75 basis points for the third time next week, according to the CME tool. FedWatch.

– CNBC’s Patti Domm and Natasha Turak contributed reporting.

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