Two-year Treasury yield jumps 17 basis points, most in 19 months

US Treasury prices fell on Tuesday as unexpectedly strong inflation and comments from a Federal Reserve official increased expectations of more aggressive interest rate increases. The two-year Treasury yield rose 17 basis points, the largest daily increase in 19 months. The previous comparable jump occurred in April 2025, when President Donald Trump announced tariffs that disrupted financial markets. The two-year yield closely reflects expectations for Federal Reserve policy.

Federal Reserve Governor Chris Waller said in London that he would consider supporting a 50-basis-point increase at the December policy meeting if core inflation remains at 0.3% or higher. Core inflation excludes food and energy prices because those categories are volatile. Waller said that such inflation readings could require a stronger policy response. Waller warned that an increase of only 25 basis points would risk the Fed's credibility.

Consumer price figures published Tuesday showed a monthly core inflation increase of 0.3%, compared with the 0.2% economists had forecast. Treasury yields climbed sharply following the release. The 10-year Treasury yield gained 10 basis points to reach 4.98%. The 10-year yield briefly exceeded 5% during the session. The 10-year yield affects borrowing costs throughout the economy, particularly mortgage rates. Market strategist Peter Boockvar said demand at Tuesday's auction of 10-year notes was weak, adding pressure on bonds.

CME FedWatch showed traders assigning a 91% probability to a quarter-point December rate increase. CME FedWatch put the probability of a half-point December increase at 9%. One week earlier, traders assigned a 77% probability to a quarter-point increase. Traders then assigned a 23% probability to unchanged rates.

BMO Capital Markets US rates strategist Vail Hartman attributed the market's reassessment of faster Fed tightening to October's economic figures and more hawkish Fed commentary. Santander chief US economist Stephen Stanley said he remained convinced that the Fed would raise rates by 25 basis points in December. Stanley said Waller's consideration of a 50-basis-point increase likely did not represent the consensus among Fed officials. However, Stanley warned that continued inflation without improvement in the coming months would threaten Stanley's forecast of no additional tightening in 2027.

US stocks finished Tuesday slightly lower. The S&P 500 declined 0.4%. The Nasdaq fell 0.74%. Nvidia shares dropped 5.47%, continuing recent weakness amid concerns about the board's investigation into reports that CEO Jensen Huang was targeted by a foreign intelligence operation. Nvidia shares finished at the lowest closing price since March 30.