TREASURIES-Bond selloff extends as traders fret about a Fed surprise

* Spectre of hikes drives bonds and futures lower

* 2yr yield above 1%; 10y above 1.85%

By Tom Westbrook

SYDNEY, Jan 18 (Reuters) - U.S. Treasury yields jumped along the curve on Tuesday, lifting the shorter end to new pandemic highs as traders braced for the possibility of a hawkish surprise from the Federal Reserve.

Two-year yields, which track short-term rate expectations, leapt 7.5 basis points (bps) and crossed 1% for the first time since February 2020.

Benchmark 10-year yields rose more than 6 bps to 1.8550% and 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 fairly aggressive comments from officials 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.

Tuesday's moves extend a sharp Friday sell-off, following a market holiday on Monday, and at 1.0176% the two-year yield is up more than 30 bps in January so far.

In the belly of the curve, five-year yields rose 8 bps on Tuesday to 1.6409%, the highest since January 2020. At the longer end 20-year yields rose 5.5 bps to 2.2441%, a more than seven-month high, and 30-year yields were also up 5.5 bps to seven-month high of 2.1830%.

"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.

(Reporting by Tom Westbrook; Editing by Himani Sarkar and Kim Coghill)

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