CORRECTED-TREASURIES-Traders price in nearly full chance of five Fed hikes in 2022

·2 min read

(Corrects typo in two-year Treasury yield to 1.208% in para 7)

By Yoruk Bahceli and Kevin Buckland

Jan 27 (Reuters) - Traders moved to price nearly five interest rate hikes from the U.S. Federal Reserve this year as markets ramped up bets on Thursday on more policy tightening after Fed chairman Jerome Powell's hawkish comments a day earlier.

Fed fund futures dated to December 2022 were priced as low as 98.785 during London trading, implying a 97% chance of five 25 basis-point rate hikes from the bank by then. That compares to four hikes priced in before Wednesday's policy meeting.

That marks a remarkable change in policy expectations from interest rate markets as investors were only expecting the Fed to start raising rates from 2023 as recently as six months ago.

The December Fed funds future contract slid over 11 ticks at one point on Thursday and was set for the largest drop in the contract's history dating back to January 2020, according to Refinitiv data.

Powell, in his news briefing after policymakers held fire as widely expected, said the committee is "of a mind" to raise rates in March, and reaffirmed plans to end its bond purchases that month. Much was left undecided, including the pace of subsequent rate hikes or how quickly officials will run off the bank's massive balance sheet.

"With inflation at 7% it's understandable that markets are taking being unsure about the appropriate path as being hawkish," said Peter McCallum, rates strategist at Mizuho in London. "So I'm not surprised to see more hikes priced into this year."

U.S. two-year yields, which are sensitive to interest rate expectations, rose to their highest levels since February 2020 at 1.208%, above the 1.1640% peak scaled on Wednesday.

The five-year Treasury yield rose to a new 25-month top at 1.7010%, outstripping the overnight high at 1.6980%.

Yields on the benchmark 10-year note eased though, flattening the yield curve, and last stood at 1.84%, down from a high of 1.88% in the previous session.

The closely watched gap between two-year and 10-year yields narrowed to as little as 63.3 basis points, the smallest margin since late November.

(Reporting by Yoruk Bahceli and Kevin Buckland; Additional reporting by Wayne Cole; Editing by Chris Reese, Sherry Jacob-Phillips and Catherine Evans)

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