U.S. 10-year yields highest since March 2021 U.S. 2-year yields rise to strongest level since March 2020 U.S. 30-year yields hits 11-week peak U.S. 10-year TIPS yields hit highest since June 2021 U.S. yield curve flattens for 2nd day NEW YORK/LONDON, Jan 6 (Reuters) - U.S. Treasury yields on most maturities rose on Thursday, as investors prepared for an earlier-than-expected interest rate hike and the possibility that the Federal Reserve may cut its bond holdings sooner than many initially thought. U.S. yields stabilized a bit in the afternoon session, with market participants looking to Friday"s nonfarm payrolls report for further clues on the rate outlook. Minutes from the last Fed meeting released on Wednesday said it might need to raise interest rates sooner than expected and also reduce its overall asset holdings to curb high inflation. Some participants noted it may be appropriate to start reducing the Fed"s balance sheet relatively soon after the first hike, underscoring a big shift in policymakers" tone over recent months as inflation has remained unexpectedly hot. read more Fed funds futures imply an 80% chance of a 25-basis point tightening at the March Fed meeting, and at least three rate hikes by the end of the year. Analysts had previously thought May or June was more likely for the first rate increase in this cycle. "The fact that the Fed is vocal about balance sheet runoff shows they recognize they are behind the curve much more than they wanted to be and are now focused on getting rates higher and tightening financial conditions," said Rob Daly, director of fixed income at Glenmede Investment Management. U.S. 2-year yields , which track near-term rate expectations, rose to the highest since early March 2020, the start of the global spread of COVID-19, at 0.87% and were last up 5 basis points on the day at 0.8796%. At the long end of the curve, 30-year yields rose to an 11-week peak of 2.138%, and were last little changed at 2.0896% . Benchmark 10-year yields rose to 1.7530%, the highest since March 2021, and were last up nearly 3 basis points on the day at 1.7299%. US 2-year yield, absolute weekly change in bps US 2-year yield, absolute weekly change in bps U.S. economic numbers on Thursday, meanwhile, were weak, with higher-than-expected jobless claims, a wider trade deficit, an underwhelming U.S. services sector index, and generally in-line factory orders. read more But on a day when the Fed is the main story for bond investors, U.S. data hardly mattered. Thursday"s moves added to a tumultuous start to 2022 for the U.S. bond market, which could be a warning shot for other asset classes such as those in emerging markets. U.S. 10-year Treasury yields have risen around 22 basis points this week, which puts them on track for their biggest weekly jump since June 2020. U.S. 2-year yields were up roughly 15 basis points and set for their biggest weekly rise since October 2019. The U.S. yield curve, meanwhile, continued to flatten, after steepening for the first two days of the year, suggesting that investors are gearing up for looming rates hike that should take short-term yields higher. The gap between 5-year and 30-yields was 61.7 basis points on Thursday. The U.S. 2-year/10-year yield curve was also flatter at 84.8 basis points . Real or inflation-adjusted yields also jumped following the minutes. On Thursday, the yield on the 10-year Treasury Inflation-Protected Securities (TIPS) rose to -0.743%, the highest since mid-June last year . U.S. 10-year real yields have risen more than 5 basis points for four straight sessions. This was the first time it happened outside of a crisis since 2007. The Fed holds more than $380 billion in inflation-indexed notes and bonds. Demand for TIPS has eased with the Fed tapering purchases of the asset and the prospect of the central bank outright selling it. January 6 Thursday 4:22PM New York / 2122 GMT Price Current Yield % Net Change (bps) Three-month bills 0.0975 0.0989 0.008 Six-month bills 0.2375 0.2411 0.010 Two-year note 99-194/256 0.8736 0.044 Three-year note 99-154/256 1.1383 0.051 Five-year note 98-238/256 1.4736 0.041 Seven-year note 98-28/256 1.663 0.031 10-year note 96-212/256 1.7264 0.023 20-year bond 98-32/256 2.1161 -0.007 30-year bond 95-96/256 2.0838 -0.003 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 18.50 -0.75 U.S. 3-year dollar swap spread 18.75 -0.50 U.S. 5-year dollar swap spread 9.00 0.25 U.S. 10-year dollar swap spread 6.00 0.75 U.S. 30-year dollar swap spread -17.50 2.50