U.S. government debt yields rose Friday after consumer pricing data posted its strongest gain in 11 months.
The Labor Department said core Consumer Price Index, which excludes volatile food and energy components, rose 0.3 percent last month as prices for motor vehicles increased. That was the biggest gain since January 2017.
Earlier, the yield on the benchmark two-year Treasury note topped 2 percent for the first time since September 2008 after the pricing data. The five-year note yield hit a high of 2.382 percent, its highest level since February 2011, while the seven-year Treasury note hit a high of 2.521 percent, its highest since September 2013.
2-year Treasury yield, 10 years
The two-year was last seen trading at 2.002.
"What's been driving rates up is this belief in the market that inflation might be returning," said James Bianco, founder of advisory firm Bianco Research. "The CPI data ran a little hotter than people were expecting."
The Labor Department's core CPI reading of 0.3 percent beat Wall Street expectations. Economists polled by Reuters had forecast core CPI rising 0.2 percent month over month. On an annual basis, CPI has increased 1.8 percent through December.
After the data, traders also began increasing their expectations for Federal Reserve rate hikes this year. They now see a hike in March, a second hike in June and a 51 percent chance of a third hike in December, according to the CME's FedWatch tool.
The yield on the benchmark 10-year Treasury note also moved higher to 2.55 percent at 2:38 p.m. ET, while the yield on the 30-year Treasury bond was slightly lower at 2.855 percent. Bond yields move inversely to prices.
"I still think that in the yields space the story to watch is in the curve," Bianco added, referring to the spread between the 2-year and 10-year yields. "You are either going to get the inflation we talked about, where the gap will hold steady or even widen, which is a story. Or we're going to get a flatter yield curve, and that's a story."
The closely watched gap between the yields on the 10-year Treasury and the 2-year Treasury has been widening in recent days, bucking the trend of the last year and providing buoyancy for bank stocks. The so-called yield curve climbed to 0.56 percentage point Friday from a low around 0.5 percentage point earlier this month.
The benchmark 10-year U.S. Treasury yield rose to its highest level since March on Tuesday, surpassing 2.5 percent, while bonds in general remained of key importance Wednesday after a report was published by Bloomberg News.
Citing people familiar with the matter, Bloomberg reported that officials in Beijing had recommended that China's government lowers — or even potentially ceases — its buying of U.S. sovereign debt. China's currency regulator has since dismissed the report, which helped ease bond market sentiment.
— CNBC's Jeff Cox contributed to this report.