Two-year yields highest since 2008 as Fed meets

NEW YORK: Two-year Treasury note yields hit more than nine-year highs on Tuesday as investors awaited the conclusion of the Federal Reserve's two-day meeting on Wednesday, when the U.S. central bank is widely expected to raise interest rates for the first time this year.

Investors are expecting the Fed to raise rates three times this year but will be looking for any indications that four increases may be likely as inflation rises and on expectations of stronger economic growth.

A key focus is if Jerome Powell adopts a more hawkish tone in his first meeting as Fed chairman than predecessor Janet Yellen and whether Fed officials change their projections for future rate increases, which is known as the "dot plot."

"We have three hikes priced in with the potential for a move in the dot plot, the potential for a hint at four rate hikes this year, that probably would be what people would be looking for," said Dan Mulholland, head of U.S. Treasury trading at Credit Agricole in New York.

A jump in consumer prices in January increased expectations for four rate hikes this year, though February's consumer price index last week showed prices cooled in that month.

Two-year note yields, which are highly sensitive to interest rate policy, jumped to 2.328 percent, the highest since September 2008. Benchmark 10-year note yields increased to 2.876 percent, after earlier rising to 2.888 percent, the highest since March 12.

If Powell adopts a more balanced or dovish tone than expected, however, bond prices may be setting up for a rally.

"It seems like the market is positioned for some hawkishness at this meeting, said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "If he strikes a more even tone or tries to maintain a more even keel, there is a chance that the market could actually react dovishly to this meeting."

A flood of Treasury supply, meanwhile, which has been concentrated in short-dated bills, has also weighed on the market.

"Bigger picture, I think people have been holding back from investing in the market, especially the front end, with very large supply coming through bills," Mulholland said.

The U.S. government needs to issue more debt to pay for a widening deficit, higher budget spending and to make up for reduced bond purchases by the Fed.