Bond Yields Rise on Higher-Than-Expected U.S. Inflation -- 3rd Update

By Paulo Trevisani and Emese Bartha

A surprisingly high U.S. inflation report revived the global bonds selloff, sending borrowing costs higher amid expectations of increased interest rates.

U.S. September Consumer Price Index rose 3.7% from a year earlier, accelerating from August's 3.4% and surpassing consensus estimates of a 3.6% pace in a Wall Street Journal survey. The core reading, which strips volatile food and energy prices, also was higher than forecast. The numbers moved away from the Federal Reserve's 2% target.

Investors reacted by dumping government bonds, sending yields higher. The 10-year Treasury yield jumped to 5.304% from 5.261%, hovering around a 24-year high reached last week. Market pricing of an interest rate increase by the Federal Reserve this month rose to a 54% probability from 22% before the CPI data, according to LSEG.

The impact was also felt in Europe. The 10-year German Bund yield jumped to 3.503% from 3.496% on the data.

Investors are bracing for an extended period of above-target inflation leading to steep borrowing costs.

"It seems difficult to believe that inflation is going to disappear overnight," said Burke Koonce, chief investment strategist at Trust Company of the South. "So, that would lead you to believe that rates are going to be higher for longer."

He said that, beyond energy costs elevated by the war in the Middle East, an investment boom in AI infrastructure is fueling demand and pressuring prices across the economy.

The inflation data came as oil prices regained momentum, with front-month Brent crude hovering around $106 a barrel.

"With the Iran War now into its eighth month, the Fed's policymakers are starting to consider the possibility that it keeps energy supplies tight and prices high well into 2027," Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said in a note.

Even before the CPI report, New York Fed President John Williams on Tuesday reiterated that the Fed might need to raise interest rates at some point in the near future.

"I don't think at this time I have any reason to believe that we would need to do ​more. But you asked 2027, we'll have to see," he said to Bloomberg.

Investors will now watch for September producer-price inflation and retail sales data on Thursday and Federal Reserve Chairman Kevin Warsh's speech at the International Monetary Fund's annual meeting on Friday.

"Together, these events could shape the near-term direction of bond yields, the dollar and, consequently, precious metals," Saxo analysts said in a note.

Write to Paulo Trevisani at paulo.trevisani@wsj.com and Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

October 14, 2026 10:11 ET (14:11 GMT)