New orders for US-made capital goods rose 1.7 percent in August, despite an expected drag from Hurricanes Harvey and Irma that devastated much of the southern United States.

The strong durable goods orders reinforced statements from Fed Chair Janet Yellen who on Monday stuck to the view that the Fed was on track for gradual interest rate increases even as inflation remains below its 2 percent goal.

Evercore ISI strategist Stan Shipley said traders had been pricing in no interest rate increases for 2018 and were unsure about whether the US central bank would hike rates at its December meeting prior to this week. But thanks to the durable goods print and statements from Yellen and other influencial members of the Fed, it's "quite clear ... that we're getting a rate hike in December."

"People thought the economy was going to be soft here; we're not clear on (what's happening in) Europe, inflation is missing in action and I think most people thought, 'The Fed may tighten once or twice and that's it,'" he said. "This number says the Fed's going to go more than that now."

Investors are also looking to a tax reform plan due to be announced on Wednesday by US President Donald Trump and fellow Republicans that could boost growth and inflation.

Benchmark 10-year US Treasury note yields rose to their highest level since Aug. 1 after the durable goods data.

Yields on the 2-year note, the most sensitive to expectations of rate increases by the Fed, rose to 1.483 percent, the highest since November 2008.

The yield for 30-year bonds rose to 2.857 percent, the highest since Aug. 16.

Fed funds futures prices show investors are now solidly pricing in a rate increase at the Fed's December policy meeting, with expectations rising to 81 percent, according to CME Group's FedWatch tool. In August, investors' expectations for a hike were just 38 percent.