By: Michael MacKenzie

(Bloomberg) — Treasuries tumbled, briefly driving 30-year yields over 4% for the first time since 2011, after an increase in a key inflation gauge fueled speculation the Federal Reserve will maintain an aggressive pace of interest-rate hikes over its next two meetings.

Policy-sensitive two-year yields led the move, surging as much as 24 basis points to 4.53%, the highest since 2007, before paring the rise to about 18 basis points by late-afternoon in New York. The five-year yield climbed 7 basis points to 4.19%, while those on 30-year bonds jumped 13 basis points to as much as 4.01% before retreating back to around 3.93%.

The selloff began when the Labor Department reported that core inflation, which excludes food and energy prices, rose to a four-decade high in September, dashing hopes that the Fed will slow the pace of its rate hikes. But bond prices recovered much of the initial hit as the trading day wore on, before shedding gains later. Stocks reversed an opening slump and rallied in the face of the news, with the S&P 500 closing up 2.6%.

“Today’s number solidifies the pathway, nullifies a notion of a pivot, and moves the bar for the Fed’s endgame and terminal rate,” said Gregory Faranello, Head of US Rates Trading & Strategy for AmeriVet Securities.

Inflation remains high despite the central bank’s efforts to cool the economy by raising its key benchmark rate by 3 percentage points since March. The core consumer price index increased 6.6% from a year earlier, the most since 1982. From a month earlier, the core CPI climbed 0.6% for a second straight month.

The bigger-than-expected increase reinforced the near-certainty that the Fed will enact another 0.75 percentage point rate hike at its November meeting and drove traders to price in strong odds of another such increase in December.

The market-implied expectation for where the Fed policy rate will peak in 2023 also increased sharply, with the derivative contract for the March 2023 Fed meeting trading as high as 4.96%, a new peak. Rate expectations remained sharply higher for the session, and just shy of their peaks.

Before the CPI data, Treasury yields had declined to session lows, with the 10-year at 3.84%, as global bond-market sentiment was buoyed by strong gains across the UK gilt curve.

The UK 10-year yield remains lower by over 20 basis points after reports that a proposed massive unfunded package of tax cuts is losing support.

The CPI data “pushes out the time when we could expect a meaningful Fed pivot,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments. “As far as Treasury yields, in the short run, it feels like the path of least resistance is higher.”

–With assistance from Liz Capo McCormick.