TREASURIES-Yields hit two-year highs on more hawkish Fed

(Updates throughout, previous SYDNEY) By Karen Brettell NEW YORK, Jan 18 (Reuters) – Benchmark U.S. Treasury yields jumped to two-year highs and two-year yields breached 1% on Tuesday as traders prepared for the Federal Reserve to be more aggressive in tackling unabated inflation. Yields have jumped since minutes from the Fed’s December meeting showed that it may raise interest rates sooner than expected and begin reducing its overall asset holdings to slow inflation and address a “very tight” job market. Hawkish comments from a slew of Fed officials have added to the view that the U.S. central bank will act quickly to dampen rising price pressures. “Even over the course of the first two weeks of January, the second week of Fedspeak in terms of the tone and the seniority of the officials that sounded more hawkish than they did in December grew quickly,” said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee. Benchmark 10-year yields reached 1.855%, the highest since January 2020, and were last 1.829%. Two-year yields, which track short-term interest rate expectations, rose above 1% for the first time since February 2020 and were last 1.018%. The two-year yield is up 28 bps in January, set for its biggest monthly rise since December 2009. The yield curve between two-year and 10-year notes was little changed on the day at 81 basis points. The Fed is not expected to raise rates when it meets next week, though it is likely to indicate that a rate increase is likely as soon as March. “You can’t rule anything out, but right now the Fed has the luxury of the markets doing the tightening for them and so they don’t have to do anything extraordinary in January,” Vogel said. “Instead, the idea that January highlights that March will be ‘live’ for a rate hike is all that’s necessary at this point.” Fed funds futures traders are fully pricing in a hike in March and three more by the end of the year. Market participants will be on their toes next week in case the Fed does bring forward any of its tightening measures. “There appears to be an outside chance that the Fed may want to act a tad more aggressively in the early part of the tightening cycle,” Eugene Leow, senior rates strategist at DBS Bank in Singapore, said in a note. “This could come in the form of ending quantitative easing completely in January, instead of waiting till March. Back-to-back hikes (something not seen since the 2004-2006 hike cycle) may also come into play,” Leow said. Yields dipped briefly after data on Tuesday showed that factory activity in New York state slumped in January amid a surge in COVID-19 infections, though manufacturers remained upbeat about business conditions over the next six months. January 18 Tuesday 9:49AM New York / 1449 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1325 0.1344 0.005 Six-month bills 0.3325 0.3377 0.036 Two-year note 99-124/256 1.018 0.051 Three-year note 99-106/256 1.3256 0.062 Five-year note 98-70/256 1.6145 0.069 Seven-year note 97-92/256 1.7807 0.065 10-year note 95-240/256 1.8287 0.057 20-year bond 96-116/256 2.2221 0.047 30-year bond 93-216/256 2.1559 0.041 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 20.25 1.25 spread U.S. 3-year dollar swap 16.25 0.00 spread U.S. 5-year dollar swap 9.00 0.50 spread U.S. 10-year dollar swap 6.25 0.25 spread U.S. 30-year dollar swap -17.75 0.50 spread (Reporting by Karen Brettell; Additional reporting by Tom Westbrook and Yoruk Bahceli; Editing by Will Dunham)

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