10-year Treasury yield surges above 1.80% to 2-year high as traders price in chance of a 50 basis point hike by the Fed

The yield on the 10-year Treasury note surged to its highest in about two years as investors returned from a three-day U.S. holiday on Tuesday, reflecting expectations for the Federal Reserve to be more aggressive in raising interest rates to battle inflation.

The yield on the 2-year Treasury-note yield, which is more sensitive to Fed rate expectations, pushed above the 1% threshold for the first time since February or March 2020.

What are yields doing?
  • The yield on the 10-year Treasury note

    was at 1.833%, compared with 1.771% at 3 p.m. Eastern on Friday. The yield traded as high as 1.857% earlier Tuesday, its highest since January 2020, according to FactSet.

  • The 2-year Treasury yield

    jumped to 1.018% versus 0.965% on Friday afternoon. Friday’s level was its highest since February 2020, based on 3 p.m. levels, according to Dow Jones Market Data.

  • The yield on the 30-year Treasury bond

    was 2.160%, up from 2.114% late Friday.

What’s driving the market?

Treasury yields have risen significantly in the new year as the Federal Reserve has signaled it will be more aggressive than previously anticipated in tightening monetary policy as it responds to persistently high inflation.

Investors have started penciling in a faster pace of interest rate increases in 2022, beginning in March when the Fed has fully wound down its program of monthly asset purchases. The Fed is also expected to begin shrinking the size of its balance sheet more quickly than previously anticipated once asset purchases are completed.

While investors have started to pencil in a faster series of rate increases, analysts said Tuesday’s jump in yields could also reflect expectations that rates will also be pushed higher than previously anticipated over the course of the hiking cycle. That would mean a higher so-called terminal rate for the fed-funds rate hiking cycle, which investors had previously seen at around 2%.

On the U.S. economic calendar, the New York Fed’s Empire State Manufacturing Index turned negative for the first time in a year and a half, and nosedived to -0.7 points in January from 31.9 in the prior month. The National Association of Home Builders will release its January index at 10 a.m. ET.

What are analysts saying?

“The market has turned more aggressive about the outlook for Fed policy. At the end of last year, the market had less than a 2-in-3 chance of a March hike. Now it has a hike fully discounted and about a 1-in-3 chance of a 50 bp (basis point) move,” said Marc Chandler, chief market analyst at Bannockburn Global Forex, in a note. “At the end of last year, the market had almost three hikes fully discounted for this year. Now the market has about 107 bp completed priced in.”

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