Two-year Treasury yield back to 2%, rate not seen since global financial crisis

Some mornings I have to dig for a lead new story. Other days I’ve got candidates crawling out of the woodwork like roaches in a dirty kitchen when the lights are off.

Today I’ve got lots and lots of choices. I’m going to begin with the bond market story since I think that’s the most important development of the day and then move to bank earnings and the Was-Mart (WMT) wage hike in later posts before I finally get to my seven stock pick of Christmas and my report on the performance of my Dividend Portfolio in 2017. (I doubt that I’ll get to all of these before the 8:00 p.m. cut off for the daily email so some may slop over into next. Especially because I’ve got a battery replacement appointment with Apple for my aging iPhone 5. I’ll let you know if anything in that experience sheds any light on Apple’s earnings report on February 1.)

Anyway…

This morning the yield on the two-year Treasury note hit 2%. The yield on this shortish term Treasury, which is extremely sensitive to expectations on interest rate moves by the Federal Reserve, hasn’t seen 2% since September 2008. The yield on the two-year Treasury is now up 17 basis points in a month and 83 basis points in a year. (It takes 100 basis points to make up a percentage point.) That’s an extraordinarily fast climb in yields (and remember that bond prices fall as yields rise.)

The driven today was a report on the Consumer Price Index that show inflation showing some uncomfortable signs of acceleration. While the headline CPI was up just 0.1% in December from November, less than the 0.2% expected by economists surveyed by Briefing.com, the core CPI, which is closer to the inflation measure the the Fed watches, rose by a bigger than expected 0.3% on the month, more than the 0.2% expected by economists. Headline CPI is now up 2.1% year over year, a slight dip from the 2.2% 12-month rate in November. But the core CPI showed a 1.8% 12-month gain in December, up from a 1.7% 12-month rate in November, and closer to the Fed’s 2% inflation target.

This pushed the debt markets to pricing in higher odds of a March interest rate increase from the Federal Reserve and an increased chance that the U.S. central bank will raise interest rates three times in 2018, instead of the two times that made up the consensus view in the financial markets just a few months back. The CME Fed Watch tool, which calculates the odds of a move by the Fed by looking at the price of futures in the Fed Funds market, now puts the odds of a March 21 rate increase at 73.7%. For June 29 the odds go up to 92.2%.