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TREASURIES-Treasury yields jump as central banks turn hawkish

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(Adds comment on jump in U.S. yields) By Herbert Lash NEW YORK, Sept 23 - U.S. Treasury yields jumped on Thursday after the Federal Reserve opened the door to raising interest rates by as early as next year, a potentially hawkish move that was reinforced by the Bank of England's outlook on rates and a rate hike by the Norwegian central bank. Yields on the benchmark 10-year Treasury note rose above 1.4% to their highest since mid-July as selling pressure on UK gilts spilled into the Treasury market after the message from European central banks. The BofE said on Thursday the case for higher rates "appeared to have strengthened," leading interest rate futures to price in a 90% chance that the British central bank would raise rates by February. Norges Bank raised its benchmark interest rate to 0.25% from zero and expects to hike again in December, saying a strong recovery in the Norwegian economy made it time to start a gradual normalization of monetary policies. It became the first major central bank to tighten policy since the COVID-19 crisis began. European Central Bank policymakers, meanwhile, are bracing for inflation to exceed the bank's already-raised estimates, paving the way to end its emergency bond purchases in March, sources involved in the discussion said. "Accounts are looking at this move in UK gilts, which is causing a lot of the selling in Europe," said Tom di Galoma, managing director of Seaport Global Holdings. "Accounts are sensing that rates are going to head higher in the fall, and they’re trying to get in front of it." The yield on benchmark 10-year U.S. Treasury notes rose 6.8 basis points to 1.399%, but three- and five-year notes rose more quickly as the market repriced the middle part of the curve. The five-year note rose above 90 basis points for the first time since early July after the Fed said on Wednesday it would reduce its monthly bond purchases "soon" and half of the central bank's policymakers projected borrowing costs will need to rise in 2022, a more hawkish tilt than in the past. The target on five-year notes is now around 1% and there will probably be more repricing as the market assesses Fed Chair Jerome Powell's hawkish stance, di Galoma said. "The central banks are starting to finally get the message that they actually need to tighten. The pandemic's basically over," he said. After the statement on Wednesday from the Federal Open Market Committee (FOMC), the Fed funds market fully priced in a rate hike by January 2023, moving projected rate hikes forward by a month. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 114.3 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.5 basis points at 0.255%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.477%. The 10-year TIPS breakeven rate was last at 2.325%, indicating the market sees inflation averaging about 2.33% a year for the next decade. The Treasury will auction $14 billion in 10-year TIPS at 1 p.m. (1700 GMT) September 23 Thursday 11:49AM New York / 1549 GMT Price Current Net Yield % Change (bps) Three-month bills 0.035 0.0355 0.006 Six-month bills 0.0475 0.0482 0.002 Two-year note 99-192/256 0.2547 0.015 Three-year note 99-148/256 0.5181 0.024 Five-year note 99-48/256 0.9188 0.052 Seven-year note 99-116/256 1.2074 0.062 10-year note 98-160/256 1.3993 0.068 20-year bond 98-16/256 1.867 0.071 30-year bond 101-216/256 1.9186 0.071 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.50 0.25 spread U.S. 3-year dollar swap 12.75 0.50 spread U.S. 5-year dollar swap 10.00 -0.25 spread U.S. 10-year dollar swap 2.50 0.25 spread U.S. 30-year dollar swap -24.75 0.50 spread (Reporting by Herbert Lash in New York Editing by Will Dunham and Matthew Lewis)

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