2-year Treasury rate surges to highest level since 2008 on hotter-than-expected inflation report

U.S. Treasury yields popped Friday, led by short-term rates, after the release of hotter-than-expected inflation data raised concern over a possible recession.

The 2-year rate jumped more than 21 basis points to 3.034%, reaching its highest level since at least June 2008. The benchmark 10-year Treasury yield also rose sharply, last trading at about 3.17%. Short-term rates moved more due to their higher sensitivity to Federal Reserve rate hikes.

The U.S. consumer price index, a closely watched inflation gauge, rose by 8.6% in May on a year-over-year basis, its fastest increase since 1981, the Bureau of Labor Statistics reported Friday. Economists polled by Dow Jones expected a gain of 8.3%.

The so-called core CPI, which strips out volatile food and energy prices, rose 6%. That’s also above an estimate of 5.9%.

“So much for the idea that inflation has peaked,” Bankrate chief financial analyst Greg McBride said. “Any hopes that the Fed can ease up on the pace of rate hikes after the June and July meetings now seems to be a longshot. Inflation continues to rear its ugly head and hopes for improvement have been dashed again.”

Meanwhile, the University of Michigan consumer sentiment reading fell to a record low, appearing to accelerate the selling in bonds.

“The crash in sentiment means that consumers are more and more worried about future economic conditions. Consumers are more pessimistic about future income with overall sentiment at the lowest on record going back to 1978,” said Jeffrey Roach, chief economist for LPL Financial. “We need to listen to what consumers say but more importantly, we need to watch what consumers do. We do expect a slowdown in consumer spending as inflation and uncertainties weigh heavily on sentiment.”

Inflation has been surging all year, leading the Fed to raise rates in order to mitigate those pricing pressures.

The Fed started raising rates in March and implemented a 50-basis-point hike in May, its largest in 22 years, with the Federal Open Market Committee meeting minutes pointing to further aggressive increases ahead.