NEW YORK: The US 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.
US 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. US 30-year yields fell as much as three basis points and benchmark 10-year yields declined by as much as two.
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 US 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 hour later.
Attention is turning to whether the US 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 meeting.
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 Tuesday.
US two-year notes were last down 1/32 in price to yield 1.397 percent, from a yield of 1.380 percent late Tuesday.
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