Two-year yields surge above 1% for first time since Feb 2020

SYDNEY: Two-year US Treasury yields rose above 1% for the first time since the start of the pandemic on Tuesday as traders positioned for the possibility of a hawkish surprise from the Federal Reserve that could end with four rate hikes this year.

Two-year yields, which track short-term interest rate expectations, leapt over 7 basis points and crossed above 1% for the first time since February 2020.

Benchmark 10-year yields rose over 6 bps to 1.8550% in early trade and Fed funds futures dived as markets baked in a hike in March and three more by the end of the year.

10-year yields came off the day's highs and were up 4 bps to 1.81% by 1125 GMT in London trading.

The Fed meets next week after a lead-in of comments by officials taken as fairly hawkish by markets, highlighting the central bank's readiness to act in the face of stubbornly high inflation.

JGB yields pulled higher by jump in Treasury yields; BOJ impact limited

"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.

Tuesday's moves extend a sharp Friday sell-off, following a market holiday on Monday.

The two-year yield is already up 30 bps in January, set for its biggest monthly rise since December 2009.

In the belly of the curve, five-year yields rose around 8 bps on Tuesday to 1.6409%, the highest since January 2020.

At the longer end 20-year yields earlier rose over 5 bps to 2.249%, a more than seven-month high, and 30-year yields rose similarly to a seven-month high of 2.1830%.

They came off the day's highs in London trading and were last up around 2-3 bps.

"Everyone is pretty sure that (the Fed is) moving soonish, and when we're talking about a 10-year bond it doesn't really matter if it's January or March, they're raising rates," said Philip Brown, senior fixed income strategist at the Commonwealth Bank of Australia in Melbourne.