Two-year Treasury yields have wiped out of their post-Thanksgiving tumble, as traders bet that the omicron impact on the U.S. economy won't delay Federal Reserve hikes.
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The yield on the short-dated notes closed at 0.69% Tuesday - the highest since March 2020 - having rallied 25 basis points from last week's low as investor fears about the new coronaviruses variant abated. The 10 year yield is less than 20 basis points below its Thanksgiving peak.
The prospect of a hike in the Fed for June is pushing the shorter end of the bond market. The risk sentiment is reviving as investors bet the economy can shake off the virus and traders look forward to Friday s inflation data and next week s Fed meeting.
According to Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore, the rising concern about the threat of the omicron variant strengthens the case for the FOMC to announce faster tapering this month. That opens the door for an earlier rate hike in 2022. While Fed Chair Jerome Powell revived bets on early rate hikes last week, a flattening yield curve points to worries that they will end up choking growth. The spread between five-year and 30 year Treasury yields has narrowed to the minimum since March 2020.
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