Bond Traders Regain Control as Stock Market Reacts to Rising Yields

Long-dated yields in the Treasury sector rose, causing a selloff in government debt and impacting the stock market. The increase in yields was driven by higher-than-expected inflation figures, casting doubt on the Federal Reserve's view that rising yields could tighten financial conditions without the need for another rate hike. The market moves are undermining the Fed's main arguments for avoiding another rate hike, and there is uncertainty about how higher longer-term rates will impact Fed policy. The dollar strengthened as investors saw higher U.S. interest rates relative to other countries, while stocks declined due to higher business costs and less attractive returns compared to government debt. Fed funds futures traders priced in a chance of a rate hike in December, and the recent rise in Treasury yields has been seen as doing some of the Fed's job of slowing down the economy.