US yields rise after Fed signals two more hikes this year

NEW YORK: US Treasury yields advanced on Wednesday after the Federal Reserve raised interest rates as expected, and signaled two more hikes this year, citing higher inflation.

US two-year yields, the maturity most sensitive to rate hike expectations, touched three-week highs, while those of 10-year notes rose to a one-week peak.

The Fed raised its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, and dropped its pledge to keep rates low enough to stimulate the economy "for some time."

Policymakers also projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

The yield curve flattened further after the Fed decision.

The yield spread between US 30-year bonds and US 5-year notes narrowed to a low of 24.4 basis points, the flattest level since January 2012.

Another yield curve measure showed that the gap between US 10-year and US two-year note yields compressed further to 39.1 basis points, the tightest since at least March 2010, according to Reuters data.

A flat yield curve suggested expectations of US interest rate increases that have boosted the short end.

"Notably with their latest economic projections, there are upgrades across the board in growth, inflation and employment," said Bill Northey, senior vice president, at US Bank Wealth Management in Helena, Montana.

"You have short-rates pushing up a bit and equity softening up with the likelihood of a fourth rate hike this year. This is not a total surprise," he added.

In afternoon trading, US 10-year yields rose to 2.988 percent, a one-week high, after the Fed rate hike, from Tuesday's 2.957 percent.

US 30-year yields were up at 3.106 percent, compared with 3.092 late Tuesday.

On the short end of the curve, US two-year yields rose to three-week highs of 2.594 percent, from 2.541 percent on Tuesday. They were last at 2.581 percent.

Earlier, higher-than-expected US producer prices in May had little impact on Treasuries, but it further flattened the yield curve.

Data released on Wednesday showed that US producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate.

"The PPI story has always struck us as more one about corporate profit compression than true inflation pass-through, at least in the current environment," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

"As we've noted in the past, the curve flattening trade begins and ends with the Fed."