TREASURIES-Two-year yield jumps as traders brace for rate hikes

SINGAPORE, Sept 28 (Reuters) - Two-year Treasury yields surged on Tuesday to 18-month highs as investors priced in the prospect of rising cash rates and the risk of persistent inflation, forcing the U.S. government to pay more to sell its debt.

The government had to double the coupon on the new note sold on Monday to 0.25% to reflect market pricing of higher overnight rates for the next two years.

It also reflects the impending rollover of the two-year future to the December contract, which implies a yield around 0.35%. Cash yields elevated to 0.3108% and have roughly doubled since June, when the U.S. Federal Reserve surprised markets by beginning to project rate hikes for 2023.

"It validates a more hawkish dot plot, and it's building on what's already baked in," Vishnu Varathan, head of economics at Mizuho in Singapore said, referring to Fed's rate projections, which now show a hike in 2022.

Monday data showing a surge in U.S. firms' capital goods orders last month could also tilt policymakers in favour of lifting rates sooner rather than later, Varathan added.

Five-year Treasuries were also under pressure on Tuesday and the yield, which rises when prices fall, crossed 1% for the first time since February 2020. It has surged 17 basis points in five sessions and last sat at 1.0051%.

Benchmark 10-year yields rose on Monday to 1.5160%, their highest since June and held just below that at 1.5010%. Growing inflationary pressures are also keeping investors nervous, with oil at three-year highs and Fed chair Jerome Powell flagging that price pressure as a result of reopening bottlenecks might be stickier than first thought.

"The market is thinking that some of the inflation is a little bit less transitory ... and so longer bond investors want a bit more compensation," Martin Whetton, head of fixed income at Commonwealth Bank in Sydney said. (Reporting by Tom Westbrook, Editing by Sherry Jacob-Phillips)