TREASURIES-Yields at two-year highs on taper fears, lack of clarity
* Five-year note yields surge on lack of Fed rate guidance
* Ten-year yields rise as Fed seen tapering in September
* $16 bln TIPS reopening draws lukewarm demand
* Fed to buy $2.75 bln-$3.50 debt due 2020-2023 on Friday
NEW YORK, Aug 22 (Reuters) - Five-year Treasuries yields surged to their highest levels since 2011 on Thursday after the release of the Federal Reserve's meeting minutes on Wednesday showed no clarity over when the central bank is likely to raise rates from record low levels. Many investors have purchased U.S. government debt due in five years or less on expectations the Fed is still far away from raising rates from rock-bottom levels. Those investors, who had expected new guidance from the Fed on when it may raise rates based on its economic targets, sold the debt after no new information was forthcoming in the meeting minutes. "The market was hoping that there would be some sort of discussion about forward guidance and reducing the unemployment rate and that didn't happen," said Tom Tucci, head of Treasuries trading at CIBC in New York. "Now you're seeing a capitulation of the front-end of the market because people have been parking out there you're seeing a complete unwind of the curve," he added. Five-year notes were among the worst performers on Thursday, with their yields jumping to 1.70 percent, up from around 1.55 percent before the minutes were released on Wednesday. The yield gap between the five-year notes and 30-year bonds tightened to 220 basis points, the smallest gap since July 11 and in from 230 basis points on Wednesday. "You get to a point where the yield curve gets too stretched and too steep and those positions become vulnerable and that's what's happened here," Tucci said. The Fed is also considering a new tool to help drain cash from the banking system and keep short-term interest rates on target when it shifts from its current cheap-money policy, the meeting minutes showed. Longer-dated Treasuries have also been hurt since Fed Chairman Ben Bernanke in May signaled that a reduction in the central bank's $85 billion a month bond purchase program was sooner than most expected. Benchmark 10-year note yields rose after the minutes were released and reached as high as 2.936 percent in overnight trading, their highest levels since July 2011. The yields have jumped from 1.60 percent at the beginning of May. Primary dealers surveyed before the Federal Reserve's July policy meeting said they expected the U.S. central bank to trim its asset purchases by $15 billion starting in September.
The Fed bought $1.496 billion in bonds due from February 2036 to February 2043 on Thursday as part of its ongoing purchase program. It will buy between $2.75 billion and $3.50 billion in notes due 2020-2023 on Friday. The most important economic indicator before the Fed's meeting on September 17-18 will be the jobs report for the month of August, due on Sept. 6. That report is "going to be ultra important. It's going to be the last one before they meet in September," said Jacob Oubina, senior U.S. economist with RBC Capital Markets in New York. "I don't think they need to see a blowout (jobs) report. Something in and around the 200,000 zone" would be enough. Data on Thursday showed that the number of Americans filing new claims for unemployment benefits rose last week but held close to a six-year low and gave a positive signal for hiring during the month. The Treasury's sale of $98 billion in new two-year, five-year and seven-year debt next week could add pressure to bond yields in the near term. Many investors have taken to the sidelines rather than risk new bond purchases losing value heading into September's Fed meeting. The Treasury had a lukewarm reception for a $16 billion reopening of five-year Treasury Inflation-Protected Securities (TIPS) on Thursday. The yield at the TIPS sale came in at minus 0.127 percent , which was the least-negative level since April 2010. On the open market, the yield on the five-year TIPS issue rose to minus 0.123 percent, a level not seen in 2-1/2 years, before easing down to minus 0.140 percent which was still about 6 basis points higher than late on Wednesday.