US Treasuries experienced a significant sell-off, driving yields sharply upward, volatility in the bond market began after Fed Governor Chris Waller stated during an appearance in London that he would consider supporting a 50-basis-point (half-point) rate hike at the central bank’s December meeting. This would be contingent on core inflation—a metric excluding volatile food and energy costs—remaining at or above 0.3%.
“Then, a stronger policy move may be needed,” he said. “Hiking only 25 basis points [a quarter point] would put our credibility at risk, a risk I am not eager to take.”
Waller noted that he intends to observe how the expansion of AI infrastructure affects the pricing of high-tech goods, as well as whether the year’s energy price increases continue to fuel inflation. While oil prices have retreated recently, they remain significantly higher than levels seen before the war in Iran.
Consumer price data released on Tuesday indicated that core inflation rose 0.3% month-over-month, surpassing the 0.2% increase that economists had anticipated. Yields spiked immediately following the release of these figures.
The benchmark 10-year Treasury yield rose 10 basis points to 4.98%, briefly crossing the 5% threshold during the session. This yield is a critical factor in determining borrowing costs across the broader economy, particularly for mortgage rates.
Market strategist Peter Boockvar noted that an auction of 10-year notes on Tuesday saw lackluster demand, which placed additional downward pressure on bond prices.
Meanwhile, Dallas Fed President Lorie Logan remarked in Houston on Tuesday that the Federal Reserve should proceed with at least two additional quarter-point interest rate hikes.
“The exact pace of increases could depend on the near-term economic and financial environment,” Logan said. “It may be possible to move more rapidly this winter than the [Fed] has moved so far this fall.”
Market participants are currently pricing in a 91% probability of a quarter-point rate hike and a 9% chance of a half-point increase in December; previously, traders had anticipated a 77% chance of a quarter-point hike and a 23% chance that the Fed would maintain current rates.
“October’s economic data profile and a hawkish shift in Fed-speak have prompted the market to reassess whether a faster pace of Fed policy tightening may be warranted,” Vail Hartman, US rates strategist at BMO Capital Markets, wrote in a note.
Stephen Stanley, chief US economist at Santander, stated in a note that he remains confident the Fed will opt for a 25-basis-point hike in December. He added that Waller’s openness to a 50-basis-point increase likely does not reflect the consensus among his colleagues.
“Having said that, I would also note that if the inflation data do not show signs of improvement in the coming months, then my expectation of no further tightening in 2027 is in jeopardy,” Stanley wrote.
Equities finished the day slightly lower on Tuesday. The S&P 500 declined 0.4%, while the Nasdaq fell 0.74%. Shares of Nvidia dropped 5.47%, continuing a recent trend of weakness amid concerns regarding a board investigation into reports that CEO Jensen Huang was the “target of a foreign intelligence effort.” Nvidia shares concluded the session at their lowest point since March 30.
