Stocks tumble and bond yields climb after worse-than-expected inflation report

New York(CNN Business) The 10-year US Treasury bond yield rose past the 2% mark for the first time since the summer of 2019 Thursday and stocks traded sharply lower after a key inflation figure rose to its highest level in nearly 40 years.

The Dow (INDU) finished 1.5%, or 526 points, lower, while the broader S&P 500 (SPX) fell 1.8%. The Nasdaq Composite (COMP) closed down 2.1%.

The last time the 10-year yield was above 2% was in July 2019. Bond yields and prices move in opposition to each other.

Although bond rates remain historically low, rising yields have sent loan interest rates, including mortgages, credit cards and other personal rates, higher in recent months. Mortgage rates jumped last week — the 30-year fixed rate mortgage averaged 3.69%, the highest level since January 2020.

As inflation rises, expect bond rates to continue to climb. The bond market often tracks expectations for the Fed funds rate, which is forecast to rise several times in 2022. The Federal Reserve — which is tasked with keeping prices stable — already signaled last month that it wants to raise interest rates to counteract high inflation.

But the risk of a more aggressive rate hike in March has now increased, said Brian Price, head of investment management for Commonwealth Financial Network, in emailed comments.

Investors initially predicted a modest quarter-percentage point hike for the first rate increase since the onset of the Covid-19 pandemic. But with inflation showing no signs of letting up, these expectations have changed.

When the inflation report came out, the odds were 50/50 between an increase of a quarter point or a half point. By the time of the stock market close, the possibility of a half percentage point hike had risen to 97%, according to the CME's FedWatch Tool.

"I expect that we'll see a return of the volatility that was prevalent for most of the month of January in the wake of this report," Price said. "Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year."

There's clearly no immediate end in sight to the soaring pandemic-era prices. Consumer prices rose 7.5% in the 12 months ending in January, Thursday's report showed. That was more than economists had expected.