TREASURIES-Treasury yields edge higher after Europe foresees rate hikes

(.) By Herbert Lash NEW YORK, Sept 23 - U.S. Treasury yields rose on Thursday after the Federal Reserve opened the door to raising interest rates by 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. The BofE said on Thursday 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. 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 began. European Central Bank policymakers, meanwhile, are bracing for inflation to exceed the bank's already raised estimates, paving the way to end to its emergency bond purchases in March, sources involved in the discussion said. The yield on benchmark 10-year U.S. Treasury notes rose 3.1 basis points to 1.362%, but three- and five-year notes rose more quickly as the market repriced the middle part of the curve. The five-year note rose above 90 basis points for the first time since early July after the Fed said on Wednesday it would reduce its monthly bond purchases "soon" and half of the central bank's policymakers projected borrowing costs will need to rise in 2022, a more hawkish tilt than in the past. The target on five-year notes is now around 1% and there will probably be more repricing as the market assesses Fed Chair Jerome Powell's hawkish stance, said Tom di Galoma, managing director of Seaport Global Holdings. "I don't think I've ever seen (Powell) be as emphatic about doing certain things than he was yesterday," di Galoma said. "The central banks are starting to finally get the message that they actually need to tighten. The pandemic's basically over," he said. After the statement from the Federal Open Market Committee (FOMC), the Fed funds market fully priced in a rate hike by January 2023, moving projected rate hikes forward by a month. 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 111.1 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.9 basis points at 0.249%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.442%. The 10-year TIPS breakeven rate was last at 2.292%, indicating the market sees inflation averaging about 2.3% a year for the next decade. The Treasury will auction $14 billion in 10-year TIPS, along with $10 billion of four-week and $25 billion in eight-week bills at 1 p.m. (1700 GMT) September 23 Thursday 10:04 AM New York / 1404 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0325 0.033 0.003 Six-month bills 0.0475 0.0482 0.002 Two-year note 99-195/256 0.2486 0.009 Three-year note 99-156/256 0.5074 0.013 Five-year note 99-70/256 0.9009 0.034 Seven-year note 99-166/256 1.1779 0.033 10-year note 98-248/256 1.3617 0.031 20-year bond 98-228/256 1.8167 0.021 30-year bond 102-236/256 1.8719 0.024 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.75 0.50 spread U.S. 3-year dollar swap 13.25 1.00 spread U.S. 5-year dollar swap 10.50 0.25 spread U.S. 10-year dollar swap 3.00 0.75 spread U.S. 30-year dollar swap -23.75 1.50 spread (Reporting by Herbert Lash; Editing by Will Dunham)