TREASURIES-Two-year yields hit two-year highs, 10-year yields dip

BY Reuters | ECONOMIC | 01/11/22 10:13 AM EST
       By Karen Brettell
    NEW YORK, Jan 11 (Reuters) - Short-dated U.S. Treasury
yields hit almost two-year highs on Tuesday as investors
prepared for the likelihood the Federal Reserve will raise rates
as many as four times this year, and before the Treasury
Department will sell new three-year notes.
    Benchmark 10-year yields dipped as more aggressive rate
hikes are also seen as likely to dent growth and inflation
    The Fed is viewed as being more aggressive than previously
expected after minutes from the Fed's December meeting released
last week showed the U.S. central bank may need to raise rates
and reduce its overall asset holdings sooner to fight unabated
    At the same time, the labor market is nearing maximum
employment, adding to the case for tightening policy.

    "The Fed is now more likely than not to begin the rate
hiking campaign at the March meeting," said Ian Lyngen, head of
U.S. rates strategy at BMO Capital Markets, and "assuming the
Fed starts in March, they'll have a higher probability of
getting to a higher terminal rate than one might have otherwise
    Market participants are now pricing in a terminal rate, or a
neutral interest rate, of around 1.75%-1.80%, up from 1.50% a
few months ago.
    Fed Chair Jerome Powell will pledge to fight inflation when
he testifies on Tuesday at a congressional hearing during which
fast-rising U.S. prices will likely spark plenty of lawmaker
questions and criticism.
    High inflation and a strong recovery will require the
Federal Reserve to raise interest rates at least three times
this year, beginning as soon as March, and warrant a rapid
rundown of Fed asset holdings to draw excess cash out of the
financial system, Atlanta Fed President Raphael Bostic said.

    Two-year note yields, which are highly sensitive
to interest rates, jumped to 0.945% and three-year yields
 reached 1.237%, both the highest since February 2020.
    Benchmark 10-year note yields fell to 1.775%,
after rising to 1.808% on Monday, the highest since January
2020. The yield curve between two-year and 10-year notes
 flattened to 83 basis points, the smallest yield
gap since Jan. 3.
    Demand for three-year debt will be tested on Tuesday when
the Treasury sells $52 billion of the notes, the first sale of
$110 billion in coupon-bearing supply this week.
    It will also sell $36 billion in 10-year notes on Wednesday
and $22 billion in 30-year bonds on Thursday.
    "Three-years are a less obvious buying opportunity just
given the amount of rate hike potential as we look into 2023 and
beyond," said Lyngen, noting that the 10-year sale may be more
attractive as "it's an opportunity for investors to buy higher
rates as the year gets started."
    The 10-year auction will come after consumer price inflation
data on Wednesday is expected to show that prices rose 0.3% in
December, with an annual increase of 6.6%, according to the
median estimates of economists polled by Reuters.

    January 11 Tuesday 9:31 AM New York / 1431 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.125        0.1268    0.005
 Six-month bills               0.285        0.2894    0.005
 Two-year note                 99-161/256   0.9408    0.037
 Three-year note               99-86/256    1.2319    0.033
 Five-year note                98-142/256   1.5535    0.017
 Seven-year note               97-184/256   1.7239    0.004
 10-year note                  96-104/256   1.7746    -0.005
 20-year bond                  97-152/256   2.1495    -0.005
 30-year bond                  95-44/256    2.0933    -0.016

                               Last (bps)   Net
 U.S. 2-year dollar swap        20.25         0.00
 U.S. 3-year dollar swap        19.25        -0.50
 U.S. 5-year dollar swap        10.00         0.00
 U.S. 10-year dollar swap        7.25         0.50
 U.S. 30-year dollar swap      -16.25         1.00

 (Editing by Howard Goller)

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