Bonds just wrapped a punishing run that yanked benchmark yields toward levels last seen in 2007. After its second-worst day this year on Thursday, trading calmed on Friday. Even so, the 10‑year's weekly climb was the biggest since May, and it ended near 4.93%, still within sight of 5%.
Friday's move fit a late‑cycle script: shorter maturities weakened while longer ones steadied. The two‑year yield jumped as high as 4.66% after the inflation print, up seven basis points at the peak and the highest since 2024, before easing. At the long end, the 30‑year slipped 2 basis points to 5.34%.
Core inflation rose 0.3% in August, topping forecasts. That added tightening premium in overnight index swaps tied to upcoming Fed dates and pushed the implied probability of a move next week to roughly nine in ten. Ian Lyngen, the head of rate strategy for the U.S. at BMO Capital Markets, wrote, "The report clears the path for the FOMC to hike next week - a move that we expect will be followed by at least an additional quarter-point by year end."
Thursday's rout, helped along by higher oil prices, set the tone. The Bloomberg US Treasury Index fell 0.6% that day, its worst session since March 20. As JPMorgan Asset Management's Priya Misra put it, "Friday's reaction reflects how much rates have moved in recent days." She added, "Basically, we think that the market has already priced in a modest hiking cycle."
After the data, TD Securities reversed course and projects September will mark the first of three rate hikes, after previously forecasting no moves through 2026.
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Beyond inflation, investors are contending with swelling government debt and a more activist Treasury that is trying to rein in borrowing costs without spooking markets. John Briggs, who runs U.S. rate strategy for Natixis Corporate & Investment Banking, said, "A Fed hike in September will help anchor the long end a bit here." He added that sour sentiment is keeping potential buyers on the sidelines even though inflation‑adjusted yields look appealing.
The latest data suggest inflation is not making much headway toward the Fed's target, with pressures linked to the Iran war's surge in energy costs, tariffs, and the data center build‑out. The labor market's resilience has kept investors focused on the risk that rates stay higher for longer. Last week, Governor Christopher Waller said the inflation data due this week would make his call for the Sept. 15‑16 policy meeting "heavily influenced."
Treasury Secretary Scott Bessent has had difficulty curbing the wider bond slide as the midterm elections approach. Even with the Treasury expanding bond buybacks this week, it barely altered that trajectory. Still, Bessent has argued the market is in "very good shape," citing robust demand at recent auctions. On Thursday, the 30‑year auction sized at $22 billion attracted historically robust demand, suggesting that higher yields are enticing some buyers.
Globally, a resurgence of conflict in the Middle East pushed Brent past $100 per barrel, pressuring bonds. Germany's 10‑year yield climbed to its most elevated mark since 2009 following the European Central Bank's second hike since the war started in late February. Despite Friday's rally, the US 10‑year remains just below the psychologically important 5% mark, a level it has touched only once, and briefly, since 2007.
Traders now lean toward a September hike and at least one more by year end. The front end has cheapened while longer maturities caught a bid, a pattern consistent with the view that "Fed credibility is compressing forward inflation expectations," as BMO's Lyngen put it. A team of Bank of America Corp. strategists, among them Meghan Swiber, wrote, "If the Fed were to refrain from hiking after today's data, it would risk a significant selloff."
Volatility remains a risk because Chair Kevin Warsh has moved away from telegraphing policy well in advance, and his ambiguity at July's meeting helped spark a sharp selloff in long bonds. For everyday investors, that means swings around each inflation release, Fed signal, and Treasury funding update are likely to continue, even as higher real yields tempt buyers and auction demand shows up in spots.
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