Bonds News

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

 (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

      January 18 Tuesday 3:07PM New York / 2007 GMT
                               Price        Current   Net
                                            Yield %   Change
 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       
 U.S. 2-year dollar swap        19.25         0.25    
 U.S. 3-year dollar swap        15.00        -1.25    
 U.S. 5-year dollar swap         8.50         0.00    
 U.S. 10-year dollar swap        6.00         0.00    
 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