TREASURIES-Yields rise as Fed eyes earlier start to rate hikes

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(Updates yields, adds analyst comments) By Karen Pierog CHICAGO, June 16 (Reuters) - U.S. Treasury yields zoomed higher on Wednesday after Federal Reserve policymakers moved up their projections for commencing interest rates hikes to 2023 from 2024 as the economy recovers from the coronavirus pandemic. At the conclusion of its two-day policy meeting, the Fed disclosed that 11 out of 18 officials were projecting at least two quarter-point interest rate increases in 2023 even as the central bank pledged to keep a supportive policy in place to aid the ongoing jobs recovery. The benchmark 10-year yield rose to its highest level since June 4 at 1.594%. It was last up 7.5 basis points at 1.5737%. The yield had trended lower over the last week as inflation concerns ebbed. The five-year yield had its biggest one-day move since February, climbing to its highest level since April 6 at 0.913%. The yield curve measuring the gap between 5-and 30-year yields flattened, with the spread falling to its lowest level since January. It was last about 9 basis points flatter at 131.46 basis points. Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York, said the changes in the so-called dot plot, where Fed officials place their projections for the federal funds rate, was the "big surprise" that drove yields higher. "It's still a long way out and (Fed Chair Jerome) Powell is trying to play down that, but I think the most anyone was looking for was one rate hike in 2023," Jones said. The fed funds futures market showed a roughly 90% chance of a rate hike by January 2023. Prior to the Fed statement, the market fully priced in a rate increase by April 2023. With inflation rising more quickly than expected and the economy bouncing back swiftly, the market had been looking for clues of when the Fed might alter the policies put into place last year to combat the economic fallout from the pandemic. As for the Fed's $120 billion in monthly bond purchases, Powell told reporters that officials were "talking about talking about" tapering them. In the meantime, officials said those purchases would continue until "substantial further progress" has been made toward the central bank's maximum employment and 2% inflation goals. The Fed raised the interest it pays on excess reserves (IOER) to 0.15% from 0.1% and the rate on overnight reverse repurchase agreements to 0.05% from 0% starting on Thursday. "The IOER hike is really about relieving some of the strains in the front-end of the curve related to a tsunami of cash in the financial system," said Guy LeBas, chief fixed income strategist at Janney Capital Management. "Banks are overreserved, money market funds are finding it hard to get positive yield anywhere - and so it addresses some of those problems." The amount of money pouring into the reverse repurchase agreement facility, which offers approved money managers the option to lend money to the Fed overnight in return for Treasury collateral, has ballooned, hitting a record $584 billion on Monday. The Fed accepted nearly $521 billion on Wednesday. The two-year Treasury yield saw its biggest one-day move since February and rose to its highest level in about a year at 0.213%. It was last 3.6 basis points higher at 0.2032%. A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was last about 4.66 basis points steeper at 136.88 basis points. June 16 Wednesday 4:27PM New York / 2027 GMT Price Current Net Yield % Change (bps) Three-month bills 0.04 0.0406 0.016 Six-month bills 0.045 0.0456 0.005 Two-year note 99-217/256 0.2032 0.036 Three-year note 99-134/256 0.4103 0.068 Five-year note 99-82/256 0.8906 0.106 Seven-year note 99-180/256 1.2948 0.101 10-year note 100-120/256 1.5737 0.075 20-year bond 101-216/256 2.1358 0.019 30-year bond 103-192/256 2.2031 0.004 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.50 -1.25 spread U.S. 3-year dollar swap 9.00 -0.75 spread U.S. 5-year dollar swap 7.00 0.00 spread U.S. 10-year dollar swap -3.00 0.00 spread U.S. 30-year dollar swap -30.25 1.75 spread (Reporting by Karen Pierog; additional reporting by Karen Brettell in New York, Editing by Leslie Adler and Will Dunham)

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