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US 2-year yield rises to highest since 2008 after Fed hikes rates; 10-year yield jumps back above 3%

  • The Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point Wednesday and indicated that two more increases are likely in store ahead.
  • The 2-year yield hit its highest level since 2008, following the Fed's announcement.
  • The yield on the benchmark 10-year Treasury note rose to a fresh high of 3 percent and the yield on the 30-year Treasury bond was also in the green.

U.S. government debt yields rose Wednesday after the Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point and indicated that two more increases are likely in store.

The 2-year yield hit its highest level since 2008 and the yield on the benchmark 10-year Treasury note rose to 3 percent, following the Fed's announcement. The yield on the 30-year Treasury bond was also in the green at 3.095 percent while the 5-year yield hit a fresh high of 2.857. Bond yields move inversely to prices.

"This was expected, I think it could have been more of a dynamite reaction if consensus was more firm and if the number of participants thinking they would hike four times this year was higher," said Chief Financial Economist at MUFG Chris Rupkey. "In reality, there are still seven foot draggers."

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Members of the committee, which sets monetary policy for the Federal Reserve, each quarter issues its so-called dot plot of member expectations for interest rates. The median of those dots moved the overall forecast to equate to two more hikes this year – likely in September and December. The group is still split though, MUFG's Rupkey pointed out, with just one more member shifting in favor of four rate hikes.

"Consensus isn't overwhelming, that's what slowed the bond market down," he said.

Yields came back slightly after their initial rise. The 10-year yield fell back below 3 percent, to around 2.985 as of 5:04 p.m. ET and the 30-year yield pared gains to about 3.09 percent.

"The markets demonstrated this is a little more hawkish and the Fed proved the value of press conference, about half the initial rise in interest rates has been unwound," said Robert Tipp, chief investment strategist at PGIM Fixed Income. "I think market reaction is understandable and consistent with what we've seen the past."

The Federal Open Market Committee (FOMC) was widely expected to announce that it would raise interest rates, and analysts were predicting a quarter-point increase.

The move pushes the funds rate target to 1.75 percent to 2 percent. The rate is closely tied to consumer debt, particularly credit cards, home equity lines of credit and other adjustable-rate instruments.

Following the two-day meeting in Washington, the European Central Bank's governing council holding its own monetary policy meeting on Thursday, and markets will be watching to see if it announces anything on the conclusion of quantitative easing.

U.S. producer prices increased more than expected in May, and led to the biggest annual increase in inflation in nearly 6-1/2 years, the Labor Department said Wednesday. Still, underlying producer inflation remained moderate.

The upward move in producer prices boosts expectations that inflation will pick up this year, and likely breach the Fed's 2 percent target.

On Tuesday, closely watched consumer pricing data, which is often viewed as an inflation barometer, rose 0.2 percent in May, matching expectations. In the 12 months through May, the CPI increased 2.8 percent, the biggest advance since February 2012, after rising 2.5 percent in April. U.S. government debt prices rose following the release of that data.

Weekly mortgage applications dropped 1.5 percent last week as rates continue to move higher. Volume was 15.4 percent lower than a year ago, the Mortgage Bankers Association said Wednesday, and refinance volume fell 2 percent for the week, off nearly 34 percent from a year ago.

— CNBC's Jeff Cox contributed to this report.