SYDNEY: Two-year U.S. Treasury yields, which track short-term interest rate expectations, rose above 1 percent for the first time since the start of the pandemic in February 2020, as traders positioned for the possibility of a hawkish surprise from the Federal Reserve that could end with four rate hikes this year.
Benchmark 10-year yields rose over 6 bps to 1.855 percent in early trade whereas Fed funds futures dived as markets baked in a hike in March and three more by the end of the year.
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.
“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.
Today’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.