Traders boosted expectations for a Federal Reserve interest-rate hike after hotter-than-expected core US inflation data, with a 90% chance of a move next week and two increases fully priced in by year-end. Interest-rate swaps showed traders ramped up bets on higher benchmark rates, with sticky price pressures seen pushing policymakers led by Fed Chairman Kevin Warsh to act. Treasuries initially dropped, then rebounded on Friday.

"The Fed is behind the curve," said David Rees, head of global economics at Schroders Plc. "The Fed can either choose a rate hike next week and a controlled rise in short-term US borrowing costs, or do nothing and risk an uncontrolled rise in long-term US borrowing costs." The consumer price index, excluding food and energy, rose by a greater-than-expected 0.3% in August from a month earlier, according to Bureau of Labor Statistics data out Friday. On an annual basis, it advanced 2.4%.

Yields on two-year notes, the most reactive to Fed policy, rose as much as seven basis points to 4.66%, the highest since 2024, before wiping out that move. Yields on 10-year securities fell five basis points to 4.91%, after earlier touching 4.98%. The outperformance of inflation-sensitive longer-dated bonds showed traders expect the Fed to tighten policy, slowing growth and cooling price pressures over time.

The report suggests inflation is making little progress toward the Fed's goal amid soaring energy costs from the Iran war, tariffs and the data center buildout. Warsh has been reluctant to tip his hand on the central bank's next move, but in a speech last month he said the Fed would "have work to do" if inflation doesn't cool "at sufficient speed."