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U.S. yields rise as 10-year set for biggest annual gain in decades

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NEW YORK — The benchmark U.S. 10-year Treasury yield rose on Friday, and was poised to close out the trading year with its biggest annual gain in decades as the Federal Reserve embarked on a path of policy tightening to tackle inflation.

The 10-year has risen about 239 basis points this year, its biggest yearly climb since at least 1953, according to Refinitiv data, as the U.S. central bank has raised interest rates at its fastest pace since the 1980s to fight stubbornly high inflation after years of loose monetary policy.

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“Bond investors bid a not so fond farewell to 2022 as they look forward to a much more attractive 2023,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors in Minneapolis.

“While stocks will struggle with slowing economic activity and the loss of inflated earnings from inflation, bonds are earning a decent income with the potential for price appreciation as yields come off their peak.”

The yield on 10-year Treasury notes was up 5.5 basis points to 3.890%.

After hitting a near-three-month low on Dec. 7 as hopes grew the Fed would signal that an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed on policy announcements from the U.S. central bank, the Bank of England and the European Central Bank earlier this month, touching a six-week high of 3.892% on Wednesday.

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Forecasts by the U.S. central bank see the Fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have said there may be a need to keep rates at a higher level for longer to tackle inflation.

The yield on the 30-year Treasury bond was up 5.5 basis points to 3.978%.

Analysts have cautioned, however, that it is difficult to put too much weight on market direction this week given the limited trading activity around the holidays.

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 a negative 53.1 basis points. An inversion is seen by many as a signal of recession.

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The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 5 basis points at 4.418%. The two-year has shot up about 369 basis points this year and was set for its biggest annual increase since the start of its regular issuance in 1972.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.369%, after closing at 2.375% on Thursday.

The 10-year TIPS breakeven rate was last at 2.282%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; editing by Barbara Lewis)

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