NEW YORK: Benchmark 10-year Treasuries ended the year with the largest yield increase since 2013 as investors prepare for the likelihood that the Federal Reserve will raise rates as soon as May. The US central bank is under pressure to hike rates to cut off surging inflation that is proving to be more stubborn than previously expected.

Fed funds futures traders are fully pricing in a rate hike by May and almost three hikes by the end of 2022. Benchmark 10-year yields are up 60 basis points on the year, the largest increase since 2013, when the yields jumped 127 basis points. That increase came after then-Fed Chairman Ben Bernanke signaled the start of the unwind of the Fed’s bond purchase program and sparked the now infamous “taper tantrum.”

Two-year note yields, which are highly sensitive to interest rate moves, ended up 61 basis points on the year, the largest increase since 2017. The yield curve between two-year and 10-year notes was at 77 basis points. The curve is only slightly flatter than where it ended last year, at 79 basis points.

The largest mover this year was five-year notes, which have jumped 90 basis points, the most since 2013. The US central bank will release minutes from its Dec. 14-15 meeting next week, which will be evaluated for any new signs that the Fed is becoming more uncomfortable with rising price pressures.

The Fed said after the December meeting that it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022. Any insight into Fed thinking around the economic risks of the Omicron coronavirus variant will likely be outdated, however, after its rapid spread over the past few weeks.

Demand for the Fed’s reverse repurchase facility hit a record $1.90 trillion on Friday as short-term lenders sought profitable places to park cash overnight. Traders and lenders are also expected to face deteriorating liquidity on contracts based on the London interbank offered rate (Libor) after the year-end deadline to stop basing new trades and loans on the benchmark. Three-month Libor was at 21 basis points on Friday and is down from an almost one-year high of 22 basis points on Wednesday.


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