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U.S. Treasury yields surged in a volatile trading session on Thursday as investors anticipated strong job reports that could spur further aggressive monetary tightening by the U.S. Federal Reserve as it seeks to fight four-decade-high inflation.

U.S. government bond yields - which move inversely to prices - have been climbing after comments by Federal Reserve Chair Jerome Powell last week that indicated the central bank will keep raising interest rates to fight inflation even as that causes pain for households and businesses.

On Thursday, benchmark U.S. Treasury 10-year yields rose by over 13 basis points to an over two-month high of 3.26% ahead of the release of a Labor Department report showing that U.S. weekly jobless claims declined further, confirming tight labor conditions.

Two-year note yields jumped to a new 15-year high of 3.511% and five-year yields increased by over 12 basis points to 3.407%.

The moves come ahead of the release of the key report on nonfarm payrolls data, due on Friday, which is likely to further cement expectations the Fed will continue with outsized rate hikes after three straight increases of 75 basis points.

“I think consensus is that all the jobs numbers this week are going to be pretty strong, and people are probably front-running that a bit,” said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital.

Hayes said he expects Treasury yields to keep climbing in the coming days until the Consumer Price Index (CPI) inflation report, due Sept. 13. “I think the bears are in control short-term, but will have an unpleasant surprise mid-month when they realize inflation is really starting to come under control,” he said.

Fed funds futures’ traders were pricing in a 75% chance of the Fed hiking interest rates by 75 basis points at its next policy-making meeting on Sept. 20-21. They expect interest rates to keep climbing to a high of over 3.95% in March, with some rate cuts priced in for later next year.

Just a few weeks ago, the expectation was for the Fed to start cutting rates as soon as March 2023 to boost a dwindling economy bruised by the current rate-hiking cycle.

“I think the anticipation around more hawkishness is coming from the various Fed speakers over the past week,” said Ryan O’Malley, fixed income portfolio manager at Sage Advisory.

“They’ve been very clear that they don’t intend to ‘pivot’ anytime soon, and were dismayed by the market pricing in an anticipation of such a pivot from mid-June through the end of July,” he said.

Real U.S. yields, as represented by Treasury Inflation-Protected Securities, or TIPS, have also been climbing in recent weeks. On Thursday, yields on 10-year TIPS jumped to 0.805%, the highest since mid-June. Five-year TIPS yields reached 0.867%, the highest since January 2019.

The breakeven rate on five-year TIPS was last at 2.661%, down from over 2.9% last week. The five years forward inflation-linked swap, seen by some as a better gauge of inflation expectations, has also declined, to 2.559% from over 2.6% earlier this week.

The closely watched part of the U.S. Treasury curve measuring the spread between yields on two- and 10-year notes stayed inverted but narrowed to minus 25.7 basis points, the steepest it has been in a week.

An inversion of this yield curve is typically a precursor to recession, predicting eight of the last nine U.S. downturns.

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