TREASURIES-Yields hit two-year highs on more hawkish Fed

    (Updates throughout, previous SYDNEY)
    By Karen Brettell
    NEW YORK, Jan 18 (Reuters) - Benchmark U.S. Treasury yields
jumped to two-year highs and two-year yields breached 1% on
Tuesday as traders prepared for the Federal Reserve to be more
aggressive in tackling unabated inflation.
    Yields have jumped since minutes from the Fed's December
meeting showed that it may raise interest rates sooner than
expected and begin reducing its overall asset holdings to slow
inflation and address a "very tight" job market.
    Hawkish comments from a slew of Fed officials have added to
the view that the U.S. central bank will act quickly to dampen
rising price pressures.
    "Even over the course of the first two weeks of January, the
second week of Fedspeak in terms of the tone and the seniority
of the officials that sounded more hawkish than they did in
December grew quickly," said Jim Vogel, an interest rate
strategist at FHN Financial in Memphis, Tennessee.
    Benchmark 10-year yields reached 1.855%, the
highest since January 2020, and were last 1.829%. Two-year
yields, which track short-term interest rate
expectations, rose above 1% for the first time since February
2020 and were last 1.018%.
    The two-year yield is up 28 bps in January, set for its
biggest monthly rise since December 2009.
    The yield curve between two-year and 10-year notes
 was little changed on the day at 81 basis points.
    The Fed is not expected to raise rates when it meets next
week, though it is likely to indicate that a rate increase is
likely as soon as March.
    "You can't rule anything out, but right now the Fed has the
luxury of the markets doing the tightening for them and so they
don't have to do anything extraordinary in January," Vogel said.
"Instead, the idea that January highlights that March will be
'live' for a rate hike is all that's necessary at this point."
    Fed funds futures traders are fully pricing in a hike in
March and three more by the end of the year.
    Market participants will be on their toes next week in case
the Fed does bring forward any of its tightening measures.
    "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," Eugene Leow, senior rates strategist at DBS
Bank in Singapore, said 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," Leow said.
    Yields dipped briefly after data on Tuesday showed that
factory activity in New York state slumped in January amid a
surge in COVID-19 infections, though manufacturers remained
upbeat about business conditions over the next six months.

    January 18 Tuesday 9:49AM New York / 1449 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.1325       0.1344    0.005
 Six-month bills               0.3325       0.3377    0.036
 Two-year note                 99-124/256   1.018     0.051
 Three-year note               99-106/256   1.3256    0.062
 Five-year note                98-70/256    1.6145    0.069
 Seven-year note               97-92/256    1.7807    0.065
 10-year note                  95-240/256   1.8287    0.057
 20-year bond                  96-116/256   2.2221    0.047
 30-year bond                  93-216/256   2.1559    0.041

                               Last (bps)   Net
 U.S. 2-year dollar swap        20.25         1.25
 U.S. 3-year dollar swap        16.25         0.00
 U.S. 5-year dollar swap         9.00         0.50
 U.S. 10-year dollar swap        6.25         0.25
 U.S. 30-year dollar swap      -17.75         0.50

 (Reporting by Karen Brettell; Additional reporting by Tom
Westbrook and Yoruk Bahceli; Editing by Will Dunham)

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