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imageNEW YORK: US Treasury yields rose on Thursday from more than one-week lows on the view that they had fallen too sharply in the prior session after the Federal Reserve maintained its outlook for only a gradual pace of interest rate increases this year.

The Fed, which as expected raised rates for the second time in three months on Wednesday, said in its policy statement that further rate increases would be "gradual." Officials stuck to their outlook for two more rate hikes this year and three more in 2018.

Wall Street's top banks also see just two additional rate rises this year from the US central bank, and most expect at least three more in 2018, a Reuters poll showed on Wednesday.

While disappointment with the Fed's outlook pushed yields lower in a knee-jerk reaction on Wednesday, that sentiment dissipated on Thursday.

"Today is kind of a rebound back to reality," said bond strategist Stan Shipley of Evercore ISI in New York.

Shipley said the number of future hikes that the Fed expects could still put upward pressure on Treasury yields as inflation also rises.

"With accelerated inflation and Fed tightening, 10-year Treasury yields are going to go through that 2.60 (percent) ceiling sometime in the next month or so," he said.

Benchmark 10-year Treasury notes were last down 7/32 in price, with yields rising to 2.531 percent from 2.504 percent late on Wednesday. Benchmark yields extended Wednesday's decline in overnight trading to hit a 10-day low of 2.486 percent.

US 30-year bonds fell 25/32 in price, and yields rose to 3.143 percent from 3.102 percent.

Two-year notes, which are considered most vulnerable to Fed policy, were down slightly in price, while yields increased to 1.328 percent from 1.316 percent.

Two-year yields, which fell more than six basis points on Wednesday to mark their biggest single-day drop since June, extended their decline in overnight trading to a 10-day low of 1.299 percent before moving higher.

Yields also increased after Dutch center-right Prime Minister Mark Rutte fought off a challenge by anti-immigration, anti-European Union rival Geert Wilders to score an election win seen as a victory against populist nationalism.

"The fact that Geert Wilders didn't win the Dutch election did remove some risk from the markets," said interest rate strategist Gennadiy Goldberg of TD Securities in New York.

Copyright Reuters, 2017

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