Markets now price about an 86% chance the Federal Reserve will raise its policy rate by a quarter percentage point at next week’s meeting, after August inflation data showed prices continued to climb.
The 2-year Treasury, which tracks expectations for near-term Fed policy, climbed 7.8 basis points to 4.628%, reaching its highest level since July 2024. The 10-year yield, a benchmark that feeds into mortgage and consumer borrowing costs, rose 2.9 basis points to 4.97% and earlier touched 4.992%, its strongest reading since October 2023. The 30-year yield was last little changed at 5.356%.
Friday’s consumer price report showed the headline consumer price index rose 0.4% in August on a seasonally adjusted basis, leaving the 12-month increase at 3.4%. Core CPI, which excludes food and energy, registered a 0.3% monthly gain, 0.1 percentage point above economists’ forecasts, and stood at 2.4% year on year. That stronger-than-expected core reading appears to be the decisive data point markets will judge ahead of the Fed’s vote.
Treasury trading has already been volatile this week. Bond markets suffered a sharp sell-off Thursday after U.S. oil prices moved above $100 per barrel amid Middle East escalation, and the Treasury Department repurchased roughly $5.2 billion of off-the-run 10-year and 20-year debt, about half of the $10.5 billion offered, which heightened selling pressure. On Thursday the 10-year yield jumped 11 basis points and reached 4.954%.
Wholesale inflation data for August also showed a 0.4% monthly increase, while core wholesale prices rose 0.2%, below consensus for 0.3%. Oil futures fell on Friday, with West Texas Intermediate settling at $100.05 per barrel, down 2.4%, and Brent at $104.61, down 2.8%.
The Fed will conclude its policy meeting next Wednesday with a decision on the target range that currently stands at 3.50% to 3.75%. Investors will enter that meeting weighing the stronger core CPI against recent swings in oil and Treasury supply dynamics, leaving bond yields and borrowing costs vulnerable to further moves depending on the Fed’s reaction.
