On Friday, November 13th, the US Treasury market experienced its largest weekly sell-off in over 18 months. The US Consumer Price Index (CPI) rose 0.4% month-over-month in October, exceeding market expectations, while the core index rose 0.3%, maintaining that level for the third consecutive month. Following the data release, the yield on the 10-year US Treasury note climbed to 5.12%, up 0.26 percentage points from the end of the previous week; the yield on the 2-year US Treasury note rose 0.32 percentage points to 4.85%, the largest increase since the end of 2024. The market has fully priced in a 25 basis point rate hike by the Federal Reserve in December, and has also factored in the probability of another rate hike in January and a third rate hike before June next year. The Fed's October meeting maintained the target range for the federal funds rate at 3.75% to 4.00%, but a clear shift in officials' statements forced adjustments to positions that had previously bet on the end of the global bond market sell-off.

Better-than-expected US inflation data triggers a sharp rise in yields.

October's Consumer Price Index (CPI) rose 0.4% month-over-month, higher than economists' expectations of 0.3%, while the core index rose 0.3%, also exceeding the expected 0.2%. The energy sub-index rose 0.7% month-over-month, food rose 0.5%, and housing contributed a significant portion of the total monthly increase. The data did not provide a complete year-over-year figure due to the base effect from the interruption of government funding last year. This result prompted the market to reassess the path of inflation decline, after yields had fallen in previous weeks as active management institutions re-established long positions following their September sell-off. Yields quickly reversed course after the data release. The 10-year Treasury yield saw its largest weekly increase since the April 2025 tariff adjustment. The 2-year yield, more sensitive to policy rates, fluctuated more dramatically, rising 0.32 percentage points in a single week. In terms of price mechanisms, both inflation expectations and real interest rates rose simultaneously, pushing the yield curve upward overall, maintaining a positive slope in the spread structure, with the 10-year and 2-year spread at approximately 0.24 percentage points.

Fed policy path repricing

The market has fully priced in a 25 basis point rate hike in December, while a tail probability of a 50 basis point hike remains. Compared to a week ago, the pricing in another rate hike in January has increased significantly from about 10% to almost fully priced in, and a third rate hike before June next year is also fully priced in. The Federal Reserve's October meeting saw a 10-2 vote to keep interest rates unchanged, with Cleveland Fed President Beth Hammark and Governor Lisa Cook advocating for a 25 basis point hike. Governor Christopher Waller stated in a speech in London that even with improved inflation in October, he still favors a 25 basis point rate hike in December; if core inflation remains at 0.3% or higher, a 50 basis point hike should be considered, otherwise "a mere 25 basis point hike would put credibility at risk." In his remarks on Thursday, Hammark emphasized the need to shift policy to a restrictive stance to prevent inflation expectations from solidifying, and preferred more frequent, small adjustments rather than aggressive, one-off actions. Chicago Fed President Austan Goolsby noted that inflation is currently at a "dangerous moment," with non-energy sectors such as services and healthcare continuing to face pressure, and AI-related investments potentially leading to overheating demand. These statements have shifted market expectations from a pause in policy to further tightening.

Position adjustments amplify short-term volatility.

Following the September sell-off, active asset managers have been buying US Treasuries again in the past two weeks, betting on the end of the global bond market sell-off. After the release of US October inflation data, yields moved inversely, forcing these positions to be liquidated quickly. Matt Scott, head of global trading at AllianceBernstein, pointed out that the yield rise was painful, and the buying by active asset managers in the past two weeks has been completely liquidated in the last two or three days, leaving market participants in a state of passive adjustment. Short-term interest rate sensitive instruments experienced more volatile trading, with the two-year yield rising this week for the largest increase since the end of 2024. Jay Barry, head of global interest rate strategy at JPMorgan Chase, believes that part of the rise stemmed from the market's internal digestion of a shift in the Fed's stance; in addition to Hammark, Goolsby, who will have voting rights next year, also made hawkish comments. During the position liquidation process, liquidity concentrated at the front end, causing the front end of the yield curve to shift upward more than the long end, but overall, no inversion occurred. In terms of pricing logic, inflation data and official statements jointly drive a reassessment of the forward interest rate path, and the rise in real interest rates reflects a reassessment of the neutral interest rate and the persistence of inflation.

Hawkish statements from officials reinforce expectations

Waller explicitly set a core quarter-on-quarter growth rate of 0.3% as the threshold for a 50-basis-point rate hike, and the actual data fell precisely at that level, directly reinforcing market discussions on the magnitude of the rate hike. Hammark emphasized that inflationary pressures were "moving in the wrong direction," expressing concern about the solidification of inflationary thinking, and stated that while the economy is not currently lagging behind the curve, a more forceful approach would be necessary if it did. Goolsby pointed out that inflation is "slowly entering areas historically difficult for central banks to handle," and cautioned against overheating demand from the service sector and AI data center construction. These statements shifted market pricing for the December meeting from a simple 25-basis-point increase to including a 50-basis-point tail risk, and further factored in subsequent rate hikes. The current target range for the policy rate is 3.75% to 4.00%, with the effective federal funds rate at approximately 3.88%. Market pricing suggests that the policy rate may continue to rise in the coming months to address persistently high inflation above the 2% target. Rising yields reflect a repricing of the persistence of inflation and the policy response function, rather than being driven by a single event.

Frequently Asked Questions

Question 1: Why did the October inflation data trigger the largest weekly sell-off in over 18 months? Answer: The data, with a month-on-month increase of 0.4% and core inflation of 0.3%, both exceeded expectations and remained high for the third consecutive month. This directly disrupted the market's previous pricing in a decline in inflation and a pause in policy, forcing established long positions to be quickly liquidated, amplifying the upward momentum of yields. Question 2: How did the statements from Fed officials change the market's pricing in a December rate hike? Answer: Waller explicitly linked the core month-on-month increase of 0.3% to credit risk, supporting at least 25 basis points and opening up to 50 basis points; Hammark and Goolsby emphasized a restrictive stance and the direction of inflationary pressures, causing the market to shift from a low probability a week ago to fully pricing in a December rate hike and its subsequent path. Question 3: Why did the two-year yield rise more than the ten-year yield? Answer: The two-year yield is more sensitive to the policy rate path; inflation data and hawkish statements directly repriced near-term and long-term interest rates. The ten-year yield, on the other hand, reflects more medium- to long-term inflation and neutral interest rate expectations, resulting in more concentrated adjustments in front-end positions and more volatile short-term yields.