US yields up along the curve as traders brace for hawkish Fed

SYDNEY: U.S. Treasury yields rose along the curve in Asia on Tuesday, lifting the shorter end to new pandemic highs as traders braced for the possibility of a hawkish surprise from the Federal Reserve.

The Fed meets next week after a lead-in of fairly aggressive comments from officials highlighting the central bank's readiness to act in the face of stubbornly high inflation.

Two-year yields, which track short-term rate expectations, jumped nearly five basis points (bps) in Tokyo trade to cross 1% for the first time since Feb. 2020.

The move extended Friday's sharp sell-off, following a market holiday on Monday, and at 1.0176% the two-year yield is up more than 28 bps in January so far. Fed funds futures are priced for a hike in March and four hikes this year.

"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," said Eugene Leow, senior rates strategist at DBS Bank in Singapore 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," he said.

Five-year yields rose 4.8 bps on Tuesday to 1.6076%, the highest since January 2020.

Benchmark 10-year yields were up about 2.8 bps to a two-year high of 1.8215%.

Further out on the curve 20-year yields rose 3 bps to 2.2201%, a more than seven-month high, and 30-year yields were also up 3 bps to a three-month high of 2.1580%. - Reuters