Rates are shooting higher on inflation fears, 10-year yield its highest in nearly 4 years

The yield on the benchmark 10-year Treasury note surged to 2.727 percent on Monday, its highest since April 2014, as investors bet on an accelerating economy and inflation.

A falling dollar this month has also helped drive yields higher, as traders worry it may reduce the appetite for Treasurys, while also boosting inflation. The 10-year yield ended December at 2.43 percent.

The yield on the 30-year Treasury bond was last seen higher at 2.953 percent; the 10-year yield was last at 2.709 Bond yields move inversely to prices.

Earlier, the 2-year Treasury note hit a high of 2.161 percent, its highest level since September 26, 2008, when it yielded as high as 2.189 percent.

"We start the week with bonds under pressure again. While the pace of the rise in yield in the short end of the yield curve isn't that surprising since the Fed's bias remains to tighten, what is more surprising is how quickly the yield on the 10-year note has shot up," Kevin Giddis, head of fixed income capital markets at Raymond James, wrote to CNBC on Monday. "It is almost as if the anticipation of inflation has been replaced with the certainty of it."

But U.S. Treasurys weren't the only bonds making headlines Monday. The German 5-year bund broke above zero for the first time since Dec. 2015 after Dutch central bank president Klaas Knot said the European Central Bank (ECB) has to end its quantitative easing as soon as possible.

"There is no reason whatsoever to continue the program," Knot said. "I feel that we need to be clear about this."

The German 5-year bund yield was last seen at 0.01 percent, while the yield on the German 10-year bund climbed to 0.697 percent.

The ECB plans to purchase bonds through the end of September, but has refrained from commenting on its path forward. ECB President Mario Draghi does not want to commit — Knot added — to prevent the value of the euro from rallying further.

"The overnight move clearly sets the stage for 2.8 percent on the 10-year and starts to put 3 percent on the table," wrote Peter Tchir of Academy Securities in a note Monday. "This is a global bond sell-off, some part of which is linked to the realization that the combination of the Federal Reserve and ECB is slowly shifting from quantitative easing to neutral in the near term and actual combined balance sheet reduction later this year."

Economic news will drive trading Monday and the rest of the week.

The Fed's policy-setting arm — the Federal Open Market Committee (FOMC) — will make a decision on interest rates on Wednesday. Though the central bank is widely expected to maintain the status quo, the meeting will be the last official meeting for current Fed Chair Janet Yellen. The FOMC expects to hike interest rates multiple times this year with Jerome Powell as its new chief.

The Labor Department's monthly jobs data will be out Friday.


The dollar fell to a three-year low last week as President Donald Trump and Treasury Secretary Steve Mnuchin offered seemingly conflicting views on the strength of the currency. Mnuchin originally seemed to favor a weaker dollar, saying "a weaker dollar is good for us as it relates to trade and opportunities," sending the euro soaring against the dollar.

But Trump quickly corrected the Treasury Secretary, saying he eventually hopes for a "strong dollar" as economic activity improves, providing the greenback with stability on Thursday.

When the dollar depreciates, the price of foreign goods increase relative to domestically priced goods, making imports more expensive, leading to an increase in inflation in the U.S. Increasing inflation, in turn, undermines the real value of each coupon payment from holding debt, driving down prices.

The dollar strengthened slightly Monday with the greenback adding 0.5 percent against the euro, trading at $1.236.

—CNBC's Saheli Roy Choudhury contributed to this report.