U.S. Treasury yields reached three-year highs on Monday as investors adjusted for the Federal Reserve to aggressively raise rates as it tries to stem soaring inflation that is running at its fastest pace in 40 years. Data last week showed that the consumer price index jumped 1.2% last month, the biggest monthly gain since September 2005. In the 12 months through March, the CPI accelerated 8.5%, the largest year-on-year gain since December 1981.

The Fed is expected to hike rates by 50 basis points at its May and June meetings, at least. Fed funds futures traders are expecting the Fed’s benchmark rate to rise to 1.27% in June and to 2.65% in February, from 0.33% now.

Housing data will be in focus this week for signs on whether a rapid jump in mortgage interest rates is beginning to dent demand, with houses already having become less affordable due to soaring prices.

'Beginning of Demand Destruction'

"We’re probably going to start to see the beginning of some demand destruction in the housing market because of the rise in mortgage interest rates,” said Thomas Simons, a money market economist at Jefferies in New York.

“I don’t think it’s enough to really spook the Fed away from their pretty aggressive take on how to address inflation,” Simons continued, however, “it will probably start to give those folks who are talking about a recession in a near-term time horizon, it’ll give them a little more ammunition for the argument and could lead to yields leveling out.”

Confidence among U.S. single-family homebuilders fell to a seven-month low in April as surging mortgage rates and snarled supply chains boosted housing costs, shutting out some first-time buyers from the market, a survey showed on Monday.

Other data this week includes housing starts on Tuesday and existing home sales on Wednesday.

Thirty-year mortgage rates have jumped to 5.13%, from 3.33% at the end of December. Concerns that the Fed will dent growth with its aggressive tightening increased after the yield curve between two-year and 10-year notes inverted late last month, which has historically been a reliable indicator that a recession will follow in one-to-two-years.

That part of the yield curve steepened back to 40 basis points on Monday, after inverting by as far as 10 basis points on April 4. Benchmark 10-year yields were last 2.855%, after reaching 2.884% earlier on Monday, the highest since Dec. 2018.

30-Year Yields Near 3%

Thirty-year yields reached 2.969%, the highest since April 2019 and in striking distance of the key 3% level. Some of the move higher in yields on Monday was seen as due to relatively light trading volumes with London closed for the Easter Monday holiday.

Demand for longer-dated and inflation-linked debt will be tested this week. The Treasury Department will sell $16 billion in 20-year bonds on Wednesday and $20 billion in five-year Treasury Inflation-Protected Securities (TIPS) on Thursday.