Two-year yields headed for largest weekly gain in two years
Traders see faster pace of rate hikes due to elevated inflation
October producer price gains below economists’ expectations

By Karen Brettell

NEW YORK, Nov 13 (Reuters) - Interest-rate-sensitive 2-year Treasury yields are headed for the largest weekly increase in over two years on Friday after hotter-than-expected consumer price inflation and hawkish Federal Reserve commentary this week led traders to ramp up bets on faster interest rate increases.

Treasury yields briefly dipped on Friday after data showed that producer price inflation was lower than economists expected in October, though it showed the largest annual gain in four years.

Yields remain sharply higher on the week as traders see rising odds that the US central bank could hike rates by a larger-than-usual 50 basis points in December, or raise rates by 25 basis points for the next three consecutive meetings.

“Inflation is stubbornly high and the Fed’s going to need to act a little bit quicker and a little bit more aggressively,” said Molly Brooks, US rates strategist at TD Securities.

Fed funds futures traders are pricing in an 11% chance of a 50-basis-point hike at the Fed’s December 8-9 meeting, which was seen as having zero probability a week ago, according to the CME Group’s FedWatch Tool.

The odds of the Fed hiking rates by a cumulative 50 basis points by January have risen to 66%, from 16% a week ago, while 75 basis points of hikes by March has 49% odds, up from 6% a week ago.

The 2-year note (US2YT=RR) yield was last down 0.94 basis point at 4.855%. It earlier reached 4.892%, the highest since October 14, and is headed for the biggest weekly increase since the first week of October 2024.

The yield on benchmark US 10-year notes (US10YT=RR) rose 5.25 basis points to 5.156%. It reached 5.174%, the highest since October 14, and is on track for its biggest weekly rise since the April 2025 “tariff tantrum.”

The closely watched yield curve between 2- and 10-year notes (US2US10=TWEB) is at 29.6 basis points. It reached 21 basis points on Thursday, the flattest level since September 24.

The prospect of a larger-than-usual 50-basis-point hike in December was raised after Fed Governor Christopher Waller said on Tuesday that the central bank should consider a half-point increase if the inflation picture worsens.

A heavy slate of Fed speakers since then has also bolstered the case that a faster pace of rate hikes may be needed to stem inflation that has been running over the Fed’s 2% annual target for almost 6 years.

Boston Fed President Susan Collins said Friday delivering price stability is of long-term benefit for the housing market even though that effort can create headwinds for the sector in the near term.

Chicago Fed President Austan Goolsbee said that inflation has spread beyond potentially temporary energy and tariff cost shocks, with the AI buildout forcing prices higher through strong demand, and many services and healthcare also experiencing price increases beyond what could be explained by oil prices or import taxes.

Concerns about the ongoing war with Iran have also added to the move higher in rates. US President Donald Trump said on Thursday the US does not need a deal with Iran and directed Vice President JD Vance, who has played a role in efforts to resolve the war, to focus “his complete and total attention” on alleged crime and corruption in Democratic-run cities and states.

US Treasury Secretary Scott Bessent, meanwhile, said on Friday that the Fed should have an open mind and not hike rates because of an “energy supply shock” tied to the Iran war.

Total Heat

Total Heat