NEW YORK: US Treasury yields rose on Friday, with the benchmark 10-year note surging to nearly three-year highs, as the market grappled with high inflation and a Federal Reserve that could easily spark a downturn as it aggressively tightens policy.

Ten-year Treasury yields were up 14.7 basis points to 2.488%, after earlier rising above 2.50% for the first time since May 2019. The 2-year yield, which typically moves in step with interest rate expectations, soared 16 basis points to 2.284% - a rate also last seen in early May 2019.

The weekly basis-point gain in the two-year’s yield was the largest since June 2009, according to Refinitiv data. The market is quickly readjusting its expectations after Fed Chair Jerome Powell said on Monday the central bank must move “expeditiously” to combat rising inflation, and he raised the possibility of a 50-basis-point rate hike in May.

Americans are going to see inflation of 6% or more in the foreseeable future, a pace that will not slow until the end of 2022 when food prices may fall, said Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank. “The Fed is going to be chasing its tail when it comes to this inflation situation. They’re behind the curve and even if they go 50 basis points in the next couple of meetings, they’re still behind the curve,” Hoedt said.

But rising prices for food and energy, items the consumer is keenly aware of, are unlikely to fall as much as policymakers would like and could keep inflation elevated, he said. “The consumer is going to have its expectations set by what happens when they go to the gas pump or the grocery store. And that has the potential to embed a wage price spiral, and I think that’s really what we’re fearful of,” Hoedt said.

The odds that the Fed is able to conduct a soft landing based on history are fairly low, said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “The Fed knows it’s behind the curve. It has to be aggressive in hiking rates and shrinking the balance sheet to fight inflation,” said Chang, adding the jobs market will remain strong this year but a recession is more likely in 2023.

“History will repeat itself. The collateral damage will be the economy.” The spread between the two- and 10-yar notes was 19.7 basis points, just above where the shorter-term yield is higher than the long end in what is called an inversion that often signals a recession. The spread between 5-year and 30-year earlier flattened to just 1.32 basis points above an inversion.

Bank of America (BofA) and Citi have joined a small but growing number of top investment banks who expect the Fed to aggressively hike interest rates against a backdrop of soaring inflation and hawkish comments from policymakers. The yield on the 30-year Treasury bond was up 9 basis points to 2.602%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 3.584%. The 10-year TIPS breakeven rate was last at 2.98%, indicating the market sees inflation averaging about 3.0% a year for the next decade.

The US dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.562%.