The 30-year bond yield fell 4.43 basis points to 5.3167%.
However, the 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 4.57 basis points to 4.596%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 32.2 basis points, reaching its flattest level since July 29.
Yields touch highest level since October 2023
Yields have surged recently as traders have been pricing in the possibility that the Federal Reserve will need to keep interest rates higher for longer, after a jump in oil prices on a recent flare-up in the Iran war revived fears of renewed inflation pressure. Price pressures have already been running well above the central bank's 2% annual target.
"Unfortunately inflation is not going toward the levels the Fed wants it to go so the story becomes what the Fed will do next. According to what we've heard from officials, we were hanging by a thread on this last data point before next week's meeting and the market now is anticipating a hike," said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute.
But he added that "the first hike is just the beginning of the journey."
"There will be multiple hikes down the road to really rein in the inflation problem," Alvarado said, noting that the yields likely lost steam after the initial reaction as the market gave the Fed "the benefit of the doubt that it will hike."
The yield on benchmark U.S. 10-year notes fell 2.41 basis points to 4.92%. Shortly after the data was released, the 10-year yield rose to 4.9915%, its highest level since October 2023.
"Until investors have confidence inflation will head back to the 2% goal, the path is wide open for the 10-year to reach 5%," Alvarado said. "It's psychological because it's the highest level we've reached in the past few years but doesn't change anything."
Some analysts view 5% on the 10-year as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equities. Higher Treasury yields also flow through to the broader economy through costlier mortgages, auto and consumer loans, and more expensive corporate and municipal borrowing.
Treasury yields swing after hotter CPI reading
Benchmark 10-year Treasury yields eased back from an earlier jump to near 5% after data showing U.S. consumer prices accelerated in August ramped up expectations for an interest rate hike from the Federal Reserve at next week's meeting.
U.S. consumer prices accelerated last month as the cost of gasoline rebounded after two straight monthly declines. The Labor Department's Bureau of Labor Statistics said the Consumer Price Index (CPI) increased 0.4% last month after edging up 0.1% in July. In the 12 months through August, consumer inflation advanced 3.4% after rising by the same margin in July.
After the data, traders were pricing in an 82.5% chance that the Fed would raise rates on September 16 at its next meeting, compared with a 67.5% probability ahead of the data, according to LSEG data.
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