Short-term bond yields continue climbing, 2-year Treasury briefly tops 3.8%

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Short-term U.S. Treasury yields continued to climb higher on Wednesday as investors digested the previous session's dramatic market route triggered by a hot inflation reading.

The yield on the 2-year Treasury, the part of the curve most sensitive to Fed policy, rose 4 basis points to 3.799%. The 2-year yield climbed as high as 3.834% during the session, its highest level since 2007. Tuesday's session saw it surge 17 points.

Yields move inversely to prices, and a basis point is equal to 0.01%.

Meanwhile, the yield on the benchmark 10-year Treasury note was down 1 basis points to 3.412%. The yield on the 30-year Treasury bond was dipped 4 basis points to 3.466%.

While short-term yields appear to be driven by Fed hike expectations, long-term yields may struggle to move far past their highs of the year, said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.

“When I look at long-term yields, I'm still not convinced we're going to see the 10-year go a huge amount higher because all we're seeing is the dominant trend of yield curve inversion,” Jones said.

August's consumer price index report on Tuesday showed inflation rise 0.1% month on month. Markets had been expecting a lower reading due to a fall in gas prices, which dropped 10.6% from the previous month. A further 75 basis point rate hike from the Fed is being priced in by markets, but there is some anticipation that the next rate increase could be even higher.

On Wednesday, the producer price index showed a decline of 0.1% in August, a slight reprieve from mounting inflation pressures, according to a Bureau of Labor Statistics report Wednesday. Excluding food, energy and trade services, core PPI increased 0.2%.

Economists were expecting headline PPI to decline 0.1% and core to rise 0.3%, according to Dow Jones estimates.

Some traders are now expecting a full point rate hike from the U.S. Federal Reserve at its September meeting, according to the CME FedWatch tracker of Fed funds futures bets. Economists at Nomura now also expect to see a full percentage hike.

The Fed will be more hawkish — expect a 75 bps hike in November, says Virtus Investment Partners' Terranova

President Joe Biden, asked during a press pool Tuesday if he was worried about the inflation numbers, replied, “No, I'm not, because we're talking about one tenth of 1 percent.”

“The stock market doesn't necessarily reflect the state of the economy, as you well know,” Biden also said. “And the economy is still strong. Unemployment is low. Jobs are up. Manufacturing is good… I think we're going to be fine.”

The mortgage market index and data on mortgage applications is due Wednesday, as well as crude oil and gasoline stocks data and the core monthly and year-on-year producer price index for August.

— CNBC's Abigail Ng and Jeff Cox contributed to this report.

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