U.S. yields surge after Fed minutes; 5-year hits highest since Feb 2020

NEW YORK — U.S. Treasury yields soared on

Wednesday after minutes of the last Federal Reserve policy

meeting came in more hawkish than expected, flagging three or

more interest hikes this year to quell surging inflation.

U.S. 2-year and 5-year yields, which mirror rate hike

expectations, climbed to their highest since March and February

2020, respectively. The benchmark U.S. 10-year yield rose to its

strongest level since April 2021, while 30-year yields climbed

to more than two-month peaks.

In its minutes of the December meeting, the Fed said it

might need to raise interest rates sooner than expected but also

reduce its overall asset holdings to tame high inflation.

The minutes also showed some participants noted that it

could be appropriate to begin reducing the size of the Fed’s

balance relatively soon after beginning to raise the federal

funds rate.

“This is news. This is more hawkish than expected. This

shift towards hawkishness could be problematic for both stock

and bond markets. Markets could struggle with this new shift,”

said David Carter, chief investment officer at Lenox Wealth

Advisors in New York.

“Indications that the Fed is very concerned about inflation

could quickly create a view that the Fed will aggressively

tighten in 2022,” he added.

Futures on the federal funds rate on Wednesday have

priced in a roughly 80% chance of a quarter-percentage-point

rate increase by the Fed at the March meeting following the

release of the minutes.

Rate futures are also implying about three Fed hikes in

2022.

In afternoon trading, the U.S. 10-year yield rose to 1.712%,

the highest since early April 2020. It was last up 3 basis

points at 1.6999%. U.S. 30-year yields also climbed

to 2.106%, their strongest level since late October, and were

last flat on the day at 2.0838%.

On the short end of the curve, U.S. 2-year yields zoomed to

their highest since March 2020 of 0.834%, and were last up 6

basis points at 0.8256%.

U.S. 5-year yields also gained, surging to their highest

since February 2020 at 1.4390%. The yield was last up nearly 6

basis points at 1.4293%.

The U.S. yield curve, meanwhile, flattened following the Fed

minutes, after steepening the last two session, with the gap

between 5-year and 30-yields at 65 basis points.

The U.S. 2-year/10-year yield curve was also flatter at 87

basis points.

A flatter curve suggested that investors are bracing for

rate hikes that should push short-term rates higher.

January 5 Wednesday 3:04PM New York / 2004 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 0.09 0.0913 0.005

Six-month bills 0.2275 0.2309 0.010

Two-year note 99-215/256 0.8316 0.068

Three-year note 99-188/256 1.092 0.070

Five-year note 99-30/256 1.4342 0.060

Seven-year note 98-80/256 1.6316 0.055

10-year note 97-4/256 1.7052 0.039

20-year bond 98-8/256 2.1219 0.017

30-year bond 95-72/256 2.0882 0.010

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 19.50 0.75

spread

U.S. 3-year dollar swap 19.50 0.50

spread

U.S. 5-year dollar swap 8.75 0.25

spread

U.S. 10-year dollar swap 5.25 0.50

spread

U.S. 30-year dollar swap -20.00 1.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by

Stephen Culp; Editing by Lisa Shumaker and Jonathan Oatis)