(Adds fresh prices)
    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 as early as next year,
a potential 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 shot above 1.4% to
their highest since mid-July as selling pressure on UK gilts spilled into the
Treasury market after the tightening message from the European central banks.
    The sudden move higher in yields surprised the market after the muted
reaction to the Fed's hawkish stance on Wednesday. The U.S. central bank said it
would reduce its monthly bond purchases "soon" and half of the Fed's
policymakers projected borrowing costs will need to rise in 2022.
    "The central banks are starting to finally get the message that they
actually need to tighten. The pandemic's basically over," said Tom di Galoma,
managing director of Seaport Global Holdings in Greenwich, Connecticut.
    Bond prices, which move opposite to their yield, plunged in afternoon
trading and tripped sell stops, said Kim Rupert, managing director, fixed income
at Action Economics in San Francisco.
    The hawkish shift among Fed policymakers, similar signs by other central
banks and the risk rally in stocks weighed heavily on Treasuries, she said.
    Treasury's announcement of $183 billion shorter-dated coupon auctions for
next week, unchanged in size so far this year, also weighed, she said.
    "Take a step back and just think about how low yields are even relative to
where we were in the first quarter of this year," said Zachary Griffiths, macro
strategist at Wells Fargo in Charlotte, North Carolina. "We do have very high
inflation, high economic growth forecasts and it's really been kind of hard to
justify where yields have been up to this point."
    The BofE said 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. Short-dated British government bond yields
soared to their highest since the market turmoil of March 2020.
    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
    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," di Galoma said. "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 8.4
basis points to 1.415%, while the 30-year Treasury note topped
1.93%, before retreating a bit.
    The Fed's reverse repo facility, which provides approved money managers the
option to lend money overnight to the U.S. central bank in return for Treasury
collateral, set a fresh record $1.352 trillion, or $128 billion more than on
Monday. Borrowing rates remained at 5 basis points.
    The five-year note rose above 90 basis points for the first time since early
July, with the target on five-year notes now around 1% and more repricing likely
in store as the market assesses Fed Chair Jerome Powell's hawkish stance as he's
considered dovish, di Galoma said.
    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 115.4 basis points. 
    The two-year U.S. Treasury yield, which typically moves in step
with interest rate expectations, was up 1.9 basis points at 0.259%. 
    The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities
(TIPS) was last at 2.489%.
    The 10-year TIPS breakeven rate was last at 2.328%, indicating
the market sees inflation averaging about 2.33% a year for the next decade.
    The Treasury auction of $14 billion in 10-year TIPS was strong, with a high
yield of -0.939% versus a six-auction average of -0.870%, according to BMO
Capital Markets. 
    September 23 Thursday 3:51PM New York / 1951 GMT
                               Price                                                             Current   Net
                                                                                                 Yield %   Change (bps)
 Three-month bills             0.03                                                              0.0304    0.000
 Six-month bills               0.045                                                             0.0456    0.000
 Two-year note                 99-190/256                                                        0.2587    0.019
 Three-year note               99-142/256                                                        0.526     0.032
 Five-year note                99-34/256                                                         0.9302    0.063
 Seven-year note               99-92/256                                                         1.2216    0.077
 10-year note                  98-124/256                                                        1.4147    0.084
 20-year bond                  97-220/256                                                        1.8794    0.083
 30-year bond                  101-144/256                                                       1.9309    0.083 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        2.75                                                              0.50    
 spread U.S. 30-year dollar swap      -24.50                                                              0.75    
 spread (Reporting by Herbert Lash in New York, additional reporting by Gertrude
Chavez-Dreyfuss in New York and Karen Pierog in Chicago; Editing by Matthew
Lewis, Nick Zieminski and Diane Craft)

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