March 21, 2018 / 7:25 PM / a year ago

TREASURIES-Yields retrace earlier rise as Fed sees 3 hikes this year

 (Updates prices, adds quote)
    * Fed policy makers largely split over need for 3 or 4 rate
    * Two-year yield hits highest since September 2008 
    * U.S. trade deficit widens in fourth quarter

    By Karen Brettell
    NEW YORK, March 21 (Reuters) - U.S. Treasury yields were
slightly lower on Wednesday after the Federal Reserve raised
interest rates and forecast two more hikes for 2018, fewer than
the three that many market participants had expected.
    Policymakers were largely split as to whether a total of
three or four rate hikes would be needed this year in their rate
projections, known as the “dot plot” because the outlooks are
plotted on a chart. They predicted rates would rise three times
next year and two times in 2020.
    There was "no change to 2018 and I think that’s why you have
such a muted reaction," said Aaron Kohli, an interest rate
strategist at BMO Capital Markets in New York. 
    A jump in consumer prices in January increased expectations
for four rate hikes in 2018, though February’s consumer price
index last week showed prices cooled that month.             
    However, “one more dot shift and we would have gotten the
expectation for four rate hikes this year, so they were pretty
close to moving in that direction,” said Kathy Jones, chief
fixed income strategist at Schwab Center for Financial Research
in New York.
    Two-year note yields           , which are highly sensitive
to interest rate policy, jumped as high as 2.366 percent, the
highest since September 2008, before falling back to 2.308
    Benchmark 10-year note yields             increased to 2.936
percent, the highest since March 12, before retracing to 2.894
    Concerns about rising bond supply as the government faces a
widening trade deficit and plans higher budget spending has also
been weighing on the market this year.
    More money for border security and fighting Russian election
hacking was expected to be included in a $1.3 trillion U.S.
government spending bill taking shape in Congress.             
    On the economy, data on Wednesday showed the trade deficit
widened to $128.2 billion in the fourth quarter.             
    A worsening deficit is seen as a likely drag on growth.
    “The recent trade data that we got show huge deficits, which
is going to feed into first-quarter GDP,” said Subadra Rajappa,
head of U.S. rates strategy at Societe Generale in New York.
    Investors are also focused on how international countries
are responding to U.S. plans to impose trade tariffs.
    Yields briefly dipped earlier on Wednesday after The Wall
Street Journal reported that China is planning countermeasures
against U.S. trade tariffs.             

 (Additional reporting by Kate Duguid in New York
Editing by Leslie Adler and James Dalgleish)
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