The benchmark 10 year Treasury yield finished the week around 5.16 percent as traders priced a December Federal Reserve rate hike with certainty after hot wholesale prices. The yield rose from about 4.86 percent a week earlier, and the move is the bond market way of saying the Fed has more work to do on inflation.
Why it matters
The producer price index rose 0.3 percent in October, putting the annual rate at 6.5 percent, the highest in nearly four years. Fed funds futures now price a hike on December 9 at 106.4 percent, which means the market expects the hike and even gives weight to a larger move. The 2 year Treasury yield rose 33 basis points on the week to 4.84 percent.
Fed officials added to the pressure with a series of hawkish speeches. San Francisco Fed President Mary Daly said her bias was that the central bank would need to raise its policy rate, and Boston Fed President Susan Collins said tighter monetary policy was coming because inflation remained high. The message from both was the same: the hiking is not over.
What happens next
Higher yields raise borrowing costs for households and businesses, and the housing market is feeling it first. Existing home sales have already slumped to their lowest since 2010, and mortgage rates follow the 10 year yield higher. The dollar also strengthened to a 19 month high as traders reassessed the interest rate outlook.
For now, the December meeting is the date that matters. The Fed publishes the minutes of its October meeting on Wednesday, and the rate decision follows on the 9th. Until then, every speech and every data release will be read for clues about whether the hike is a quarter point or something bigger.
The yield move also matters for the housing market, which has already felt the squeeze. Existing home sales slumped to their lowest since 2010, and mortgage rates follow the 10 year yield higher, which means higher monthly payments for every buyer. The standoff between sellers who will not cut prices and buyers who cannot afford the payments has frozen the market, and higher yields will freeze it further. The Fed knows this, and the December decision will weigh the housing pain against the inflation data. That tension is the story of the next month.
