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imageNEW YORK: US Treasury prices fell on Friday with short-dated yields spiking up after Federal Reserve Chair Janet Yellen said gradual US interest rate increases would be appropriate if the economy improves further and the labor market tightens.

The yield spread between short- and long-dated Treasuries narrowed in reaction to Yellen's rate-hike comment as traders favored longer maturities over shorter ones in anticipation that the Fed may raise rates as early as June.

"The market wasn't looking for anything from Yellen.

It ended up she said something that was a bit hawkish especially for her," said Thomas Roth, head of US Treasury trading at Mitsubishi UFJ Securities USA Inc. Market reaction was muted ahead of a three-day US holiday weekend with below-average trading volume.

The US bond market closed early at 2 p.m. (1800 GMT). It will be shut on Monday for the US Memorial Day holiday. Despite the possibility of a looming rate hike, investors do not expect longer-dated US yields to increase much higher from current levels due to persistent demand especially from overseas investors who are facing negative or near zero yields.

"There is still tremendous demand for duration (longer-dated bonds) across the globe especially from Europe," said John Bredemus, vice president of Allianz Investment-US in Minneapolis.

Benchmark 10-year Treasury notes were down 8/32 in price for a yield of 1.851 percent, up nearly 3 basis points from Thursday. Two-year yield was up over 4 basis points at 0.911 percent, while five-year gained 4 basis points at 1.386 percent.

On Wednesday, two-year and five-year yields reached their highest in 10 weeks at 0.938 percent and 1.424 percent, respectively.

Earlier Friday, traders shrugged off the government's revised estimate on first quarter gross domestic product, which was up 0.8 percent from the initially reported 0.5 percent.

Analysts polled by Reuters had forecast an upward revision to 0.9 percent.

Interest rates futures implied traders saw a 34-percent chance the Fed would raise rates at its June 14-15 policy meeting, up from 26 percent on Thursday.

Traders had priced as low as a 24-percent chance of a June hike early Friday before Yellen's comment, according to CME Group's FedWatch program.

Copyright Reuters, 2016

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