US Treasury yields hit post-crisis highs as expectations for more aggressive Fed rate hikes ramp up

A trader works on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid

• US treasury yields touched their highest levels since the Great Recession on Thursday. 
• The two-year yield inched up to 4.60% and the 10-year climbed to 4.16%.
• The rise is fueled by expectations of big rate hikes at the next two Fed policy meetings.

US Treasury yields touched their highest level since the Great Recession on Thursday, inching up as expectations for more aggressive rate hikes grip the bond markets.

The two-year Treasury yield–the note most sensitive to expectations of Fed policy–traded up to 4.60% on Thursday, its highest level since 2007. The 10-year Treasury yield hit 4.16%, its highest level since 2008.

Those increases have largely been fueled by anticipation of the Fed keeping rates higher for longer, with hawkish comments from central bank officials sending markets on a rollercoaster ride in recent months. Stocks briefly plunged and yields inched higher after September inflation clocked in above expectations last week, a sign that markets were beginning to price in a peak fed funds rate of 4.5%-5% and the possibility of two more 75 basis point rate hikes. 

The rise in yields on Thursday may have been fueled by more hawkish comments from Fed officials, which have raised Wall Street's anxiety over an incoming recession. Minneapolis Fed President Neel Kashkari warned the terminal fed funds rate could be even higher than expected this week, putting investors on edge.

"​​If we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping at 4.5%, or 4.75% or something like that. We need to see actual progress in core inflation and services inflation and we are not seeing it yet," Kashkari said on Tuesday.

And those conditions don't appear to be in sight. September's Consumer Price Index showed that core inflation was still accelerating, and experts have pointed out that labor market conditions, such as the job openings rate, are barely starting to cool.

Further Fed tightening meant to cool the economy down likely means more pain ahead for stocks. Billionaire investor Ray Dalio predicted that a terminal rate of 4.5% could send the market down as much as 20%, and in a more severe economic forecast, "Dr. Doom" economist Nouriel Roubini predicted stocks could plunge as much as 40%.

Fed officials will convene on November 1-2 at the next Federal Open Market Committee meeting, where they are widely expected to issue another 75 basis point rate hike. That would be the fourth jumbo increase this year, and would bring the fed funds rate to a range of 3.75%-4.00%.