The yield on the 2-year U.S. Treasury note topped 5% on Tuesday, and rose to its highest level since 2007 as investors assessed comments from Federal Reserve Chairman Jerome Powell, who said the central bank may need to increase the pace of interest rate hikes again.
The 2-year Treasury yield was last trading more than 12 basis points higher at 5.015%.
Meanwhile, the yield on the benchmark 10-year Treasury dipped one basis point 3.97% after briefly topping the key 4% level earlier in the session.
Yields and prices have an inverted relationship. One basis point equals 0.01%.
Treasurys
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in remarks prepared for two appearances this week on Capitol Hill.
"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell added.
The Fed chair's comments suggested to investors that the terminal level of the federal funds rate could be higher than previously indicated, and that investors could expect a rate hike that is possibly larger than the most recent 25 basis point increase at the central bank's next policy meeting.
Still, some investors found the comments unsurprising as the Fed continued to fight inflation in a campaign that included eight consecutive interest rate hikes since March 2022.
"While some market participants might have been caught off guard by Powell's comments, the reality is that he is largely affirming what the bond market has already priced in," said Charlie Ripley, senior investment strategist at Allianz Investment Management.
"The terminal level for policy rates will be slightly higher than previous expectations as the timing of an economic slowdown has been pushed further down the road," Ripley said.
Concerns about the pace of rate increases dragging the U.S. economy into a recession have spread among investors and prompted many to hope for the Fed to pause rate hikes this year.
However, in recent weeks, Fed officials have hinted that rates could go higher still and remain elevated for longer. That comes as the latest round of inflation data suggested that pressures from rising prices is continuing.
Both wholesale and consumer inflation prints increased for January, coming in higher than expected on a monthly basis, as did January's personal consumption expenditures price index reading. The latter is one of the Fed's favored inflation gauges.
A raft of fresh economic data is due this week including February's jobs report on Friday.