* U.S. 2-year yield hits highest since June 2009
* Fed expected to raise rates at end of meeting
* Longer-dated yields fall in curve flattener trade
By Sam Forgione
NEW YORK, March 15 The U.S. Treasury yield curve
flattened on Wednesday, with two-year yields touching their
highest since mid-2009 and long-dated yields falling, as
investors braced for a Federal Reserve rate increase and the
potential for a more aggressive pace of future hikes.
U.S. two-year yields, which are considered most vulnerable
to Fed policy, rose to 1.401 percent, their highest since June
2009, while three-year yields hit 1.700 percent, their highest
since April 2010. U.S. 30-year yields fell as much as three
basis points and benchmark 10-year yields declined by as much as
Interest rates futures implied traders saw a 93 percent
chance the Fed would announce it was raising rates by a quarter
percentage-point at the end of its two-day meeting, CME Group's
FedWatch program showed. That was up from 90.8 percent Tuesday.
"Investors are paying their respect that today's a Fed
hiking day, and the two year yield is more sensitive to the
moves, so that's why it's moving up," said George Goncalves,
head of U.S. rates strategy at Nomura in New York.
The Fed is scheduled to release its latest policy statement
along with updated economic forecasts at 2 p.m. EDT (1800 GMT).
Fed Chair Janet Yellen is due to hold a press conference half an
Attention is turning to whether the U.S. central bank will
signal an even faster pace of monetary tightening this year than
the current three rate hikes that it projected at its December
Longer-dated yields fell since rate increases reduce
inflation expectations, thereby boosting longer-dated Treasuries
prices and pushing their yields lower since inflation is a risk
to the debt because it erodes their interest payouts.
Data showing a steady increase in inflation, with the
consumer price index posting its biggest year-on-year increase
in nearly five years in February, reinforced expectations for a
Fed rate increase Wednesday and a potential uptick in the Fed's
projected number of rate hikes this year.
"The Fed would have had this data, and the market
expectation might be that the probability of them sounding
hawkish might have marginally gone up," said Aaron Kohli, an
interest rate strategist at BMO Capital Markets in New York.
Benchmark 10-year Treasuries prices were last up
1/32 to yield 2.589 percent, from a yield of 2.595 percent late
U.S. two-year notes were last down 1/32 in price to yield
1.397 percent, from a yield of 1.380 percent late Tuesday.
March 15 Wednesday 11:16AM New York / 1516 GMT
US T BONDS JUN7 147-7/32 0-12/32
10YR TNotes JUN7 122-240/256 0-16/256
Price Current Net
Yield % Change
Three-month bills 0.7575 0.7695 -0.005
Six-month bills 0.91 0.9269 -0.005
Two-year note 99-122/256 1.397 0.017
Three-year note 99-202/256 1.6975 0.013
Five-year note 98-212/256 2.1253 0.002
Seven-year note 98-52/256 2.407 -0.007
10-year note 97-20/256 2.5857 -0.009
30-year bond 97-12/256 3.1531 -0.020
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 32.50 0.00
U.S. 3-year dollar swap 25.00 0.00
U.S. 5-year dollar swap 10.00 0.25
U.S. 10-year dollar swap -3.00 0.25
U.S. 30-year dollar swap -37.50 0.75
(Reporting by Sam Forgione; Editing by Chizu Nomiyama)