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NEW YORK, April 27 (Reuters) – Treasury yields rose at the long end on Wednesday after the prior day’s rally as investors awaited greater clarity on the “restrictive” policy the Federal Reserve plans to pursue next week to combat inflation by curbing economic growth.

The yield on 10-year Treasury notes was last up 5.2 basis points to 2.824%, rebounding from earlier declines in yields across the curve. Three- and six-month bills were lower, but from two-year notes to 30-year bonds yields were higher.

“This week a lot of the price action you’ve seen in bonds has a lot more to do with the volatility,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

“There was also a feeling that perhaps the market had risen too fast too quickly,” she said, as investors anticipate an aggressive Fed as it sets about tackling high inflation.

Data showing the U.S. trade deficit in goods widened to a record high in March had little impact on the market, though it likely will add to the slower growth the Fed will cause as it pursues plans to shrink its USD 8.9 trillion balance sheet.

Trade has subtracted from gross domestic product growth for six straight quarters, the longest such stretch since the beginning of 2016.

The Fed and other central banks are moving into restrictive territory, said Marvin Loh, senior global macro strategist at State Street, referring to policy that restricts liquidity by lowering money supply make loans and credit more expensive.

But Loh said there’s a misunderstanding about how the policy, also referred to a quantitative tightening, actually works. The Fed will announce further details when policymakers meet May 3-4.

“We have very, very few experiences in terms of shrinking the balance sheet. They’ve only tried it once, and it ended fairly horribly,” he said, Referring to the Fed’s attempt in 2018 to reduce the balance sheet.

The Treasury sold USD 49 billion in five-year notes at a high yield of 2.785%. The auction was a little bit weaker than expected, Rajappa said.

The yield on the 30-year Treasury bond was up 4.4 basis points at 2.914%.

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 23.3 basis points.

The two-year U.S. Treasury yield was up 0.7 basis point at 2.589%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.3%, after closing at 3.274% on Tuesday, down from a more than 17-year peak of 3.639% hit last week.

The 10-year TIPS breakeven rate was last at 2.893%, indicating the market sees inflation averaging about 2.9% a year for the next decade.

The U.S. 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 2.632%.

(Reporting by Herbert Lash; editing by Barbara Lewis and Jonathan Oatis)

SYDNEY, April 28 (Reuters) – The dollar was nearing heights not seen in two decades on Thursday as the energy crisis in Europe hamstrung the euro, while the yen was undercut by expectations the Bank of Japan would stick to its super-easy policies.

Measured against a basket of currencies, the dollar index had reached a five-year top of 103.28 and a further push above 103.82 would see it to levels not visited since late 2002.

The euro was pinned at USD 1.0553, having hit a five-year low of USD 1.0515 on Wednesday. The single currency has fallen 4.6% so far in April and is heading for its worst month since early 2015.

The currency is now perilously close to huge chart support levels stretching from USD 1.0500 down to a trough from 2017 at USD 1.0344. A break would take it to depths not seen since 2002 and risk a damaging decline below parity.

The slide only adds to Europe’s economic troubles as it raises the cost of energy priced in dollars, just as natural gas costs soar on Russia’s move to cut off Poland and Bulgaria.

“This appears to be the first overt act of energy warfare,” warned Helima Croft, head of global commodity research at RBC Capital Markets.

“The question now is whether the cut-off will extend to other major importers in what could quickly become a stark test of European resolve to support Ukraine in the face of surging energy prices and rising recession risks.”

Such risks could also make the European Central Bank reluctant to tighten aggressively, leaving it lagging far behind the Federal Reserve.

Markets 0#FF: are wagering the Fed will hike by 50 basis points in May, June and July, and ultimately lift rates to around 3.0% by the end of the year. The ECB is seen maybe reaching 0.5% by Christmas.

The Bank of Japan (BOJ) is not even close to tightening as it doggedly buys bonds to keep yields near zero.

The central bank holds a policy meeting on Thursday and is widely expected to reaffirm its yield guidance, even as it raises the outlook for inflation.

The diverging outlook on rates has seen the dollar resume its climb on the yen to reach 128.44 too be within spitting distance of its recent 20-year peak of 129.43.

One possible pot hole for the dollar will be data on U.S. gross domestic product due later Thursday.

While the market forecast is for growth of 1.1%, the risk is to the downside after the U.S. trade deficit blew out to a record and implied a large drag from net exports.

Analysts at NatWest Markets now fear GDP may have actually contracted by an annualized 1.3% in the first quarter. Any negative reading could temper the dollar’s ascent, if only temporarily.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)