* Fed raises rates by a quarter point
* Fed sees 3 more rate hikes in 2017, pushes yields higher
* Yield curve flattens
(Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss and Dion Rabouin
Dec 14 Shorter-dated U.S. Treasury yields surged
on Wednesday, with those on two-year notes climbing to their
highest in more than seven years after the Federal Reserve
raised interest rates for the first time in a year and flagged
more rate increases in 2017.
Yields on two-year Treasury notes rose to their
strongest level since August 2009, while three-year yields
hit their highest since May 2010. U.S. five-year
yields rose to their highest since May 2011 and
seven-year yields hit a 2-1/2-year peak.
Shorter-dated maturities are the most vulnerable to the
Fed's monetary policy moves as an increase in U.S. overnight
rates reduces their value most immediately.
Benchmark U.S. 10-year yields meanwhile climbed to more than
The Federal Open Market Committee, which raised rates by a
quarter point on Wednesday, said it anticipates lifting rates
three more times in 2017, an increase from the Fed's September
meeting at which the committee said it expected just two hikes.
The increase of 25 basis points to 0.50-0.75 percent was
largely expected but the expansion of the Fed's so-called dot
plot caught the market slightly off guard, analysts said.
But more important than next year's expected faster pace of
tightening was that the Fed's longer-run outlook for growth and
inflation remained unchanged, leaving the longer-term path for
rates little changed, said Lindsey M. Piegza, chief economist at
Stifel Fixed Income in Chicago.
"The Committee sees the potential for a modest uptick in
prices and activity over the next 12-24 months, but in the long
run, the Fed's forecast for a moderate trajectory of the economy
remains," said Piegza.
"Despite the market's more optimistic view with pro-growth
policies potentially ushered in next year, the Fed expects to
maintain a slow and 'gradual' pace."
In late trading, U.S. two-year Treasury notes were last down
5/32 in price to yield 1.263 percent, an increase of 9 basis
points from late on Tuesday. The three-year note dropped 10/32
to yield 1.578 percent, a gain of 11 basis points. The five-year
note fell 18/32 to yield 2.032 percent, up 12 basis points.
U.S. 10-year Treasury notes dropped 21/32 to
yield 2.559 percent, 8 basis points higher than on Tuesday.
The yield curve was also flatter, with the spread between
the U.S. two-year and 10-year notes at around 130 basis points.
The flatter yield curve was an acknowledgement to the additional
rate hike implied in the Fed dot plots, said Marvin Loh, global
market strategist at BNY Mellon in Boston.
(Reporting by Dion Rabouin; Editing by Bill Trott and Meredith