Bond Yields, Dollar Surge With Fed Bets as Recession Risk Grows

The hottest US inflation in four decades will push the Federal Reserve to raise interest rates more aggressively this year, and a recession may not be far behind.

Those are the dramatic signals coming from markets, which on Monday saw yields surging across the board: 10-year rates hit the highest since 2011, while their two-year equivalents jumped to levels last seen before the global financial crisis and 30-year yields climbed to the highest in more than three years. Bloomberg’s dollar gauge touched peaks last seen early in the Covid pandemic, adding to a backdrop that sparked a spiral in risky assets.

Meanwhile, a closely-watched part of the US yield curve inverted -- backed by leaping Treasury futures volumes -- amid concern that tighter monetary policy will take a bigger toll on economic growth. Data on Friday showed consumer prices accelerated to a 40-year high.

The surge in yields and fall in share prices “makes sense in wake of the astoundingly strong CPI we had on Friday,” Matthew Hornbach, global head of macro strategy at Morgan Stanley said on Bloomberg Television. “Inflation is really the Achilles’ heel of risk markets. This economy is going to require higher real rates to slow it down and put some downward pressure on inflation.”