(Corrects auction dates in 15th paragraph) 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 1.87%, the highest since January 2020. Two-year yields, which track short-term interest rate expectations, rose above 1% for the first time since February 2020 and were last 1.043%. The two-year yield is up 31 bps in January, on track for its biggest monthly rise since December 2009. The yield curve between two-year and 10-year notes steepened one basis point to 82 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. They are also beginning to price in a small chance of a 50 basis point hike in March, at 6.6%. Market participants will be on their toes next week in case the Fed does bring forward any of its tightening measures. There has been chatter about an even earlier end to QE in anticipation of a March hike,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a note. However, “the tone of the FOMC statement and Powell’s press conference will be far more informative as the market seeks clarity to the most pressing question at the moment; assuming a March lift-off, how quickly will further rate hikes and balance sheet normalization follow?,” he added. Inflation expectations edged higher on Tuesday with breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) last at 2.83%. They have fallen from around 3.20% in mid-November. The Treasury Department will sell $20 billion in 20-year bonds on Wednesday and $16 billion in 10-year TIPS on Thursday. 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. Other data showed that confidence among U.S. single-family homebuilders slipped in January after four straight monthly increases. January 18 Tuesday 3:07PM New York / 2007 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1375 0.1395 0.011 Six-month bills 0.3525 0.358 0.056 Two-year note 99-112/256 1.0425 0.076 Three-year note 99-84/256 1.3551 0.091 Five-year note 98-28/256 1.6495 0.104 Seven-year note 97-24/256 1.8222 0.106 10-year note 95-152/256 1.8681 0.096 20-year bond 95-236/256 2.2562 0.081 30-year bond 93-52/256 2.1864 0.071 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 19.25 0.25 spread U.S. 3-year dollar swap 15.00 -1.25 spread U.S. 5-year dollar swap 8.50 0.00 spread U.S. 10-year dollar swap 6.00 0.00 spread U.S. 30-year dollar swap -18.75 -0.50 spread (Reporting by Karen Brettell; Additional reporting by Tom Westbrook and Yoruk Bahceli; Editing by Will Dunham and Nick Zieminski)
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