What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.617%
was at 1.621%, up from with 1.583% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
1.994%
rose to 2.007%, up from 1.955% on Friday.

The yield gains for the 10 and 30-year Treasurys brought rates to around their highest since at least Oct. 25.

The 2-year Treasury note yield BX:TMUBMUSD02Y was virtually unchanged at 0.522%, which keeps the short-term note’s rate at 3 p.m. ET highs not seen since March 18, 2020, according to Dow Jones Market Data.

What’s driving the market?

Inflation worries remained front and center, amplified by the release last Wednesday of the October consumer-price index, which showed a much hotter-than-expected 6.2% year-over-year rise, the fastest in nearly 31 years.

Treasurys initially pulled back early Monday but were headed higher by late morning, following last week’s selloff that drove up yields, particularly at the short end of the curves. Analysts said bond-market volatility is likely to continue to climb, potentially sending ripples into other asset markets.

In the Treasury market, the frontloading of rate-hike expectations is stoking worries that the Fed will be forced to act aggressively, potentially sparking an economic downturn. As a result, longer-dated yields have remained largely steady, while real, or inflation-adjusted yields, have fallen toward all-time lows at the long end.

Market-based indicators are showing an increased likelihood for two or more interest-rate hikes in 2022, as measured by federal-funds futures, which shows an 83% chance of such a pace of rate increases, up from 60% a month ago.

Meanwhile, debate around Fed leadership continues, with current Chairman Jerome Powell holding a 70% chance of renomination, according to data from Predictit. Fed Gov. Lael Brainard also has been interviewed for the Fed’s top job, according to a report.

On the economic front, the New York Fed’s Empire State Index rebounded in November, rising 11.1 points to 30.9. Economists had expected a reading of 22, according to a survey by The Wall Street Journal.

Looking ahead, retail sales data for October due on Tuesday, will provide further guidance about the impact of inflation on consumer spending habits, particularly as the holiday season in the U.S. gets under way. Data on industrial production and imports and exports, also due Tuesday, will be closely watched.

What are analysts saying?

“Bond market volatility is now up to the highest we’ve seen since the intense COVID period last spring and, indeed, is much higher than much of what we’ve seen over the past five years,” said Steven Barrow, head of G-10 strategy at Standard Bank, in a note. “That’s understandable,” he wrote. “Investors not only have the uncertainty of the monetary tightening process to figure out at the front end of the curve, but also the juxtaposition of high inflation with signs that growth is faltering. It might be a long way from the stagflation fear that must be every investors’ worst nightmare, but it is likely to keep volatility high in the bond market and elsewhere,” Barrow wrote.

“Interest rates bounced modestly following last week’s hot reading on inflation, but Treasury yields remain deeply negative on a real basis (adjusted for inflation), causing investors to allocate to other risk assets, such as equities and crypto. The dollar index shot to the highest level since last July on a shift in expectations for Fed rate policy,” wrote Mark Hackett, chief of investment research at Nationwide.