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TREASURIES-Yields rise slightly as traders doubt hawkish Fed outlook

* Fed raises interest rates for second time this year

* Fed forecasts one more rate rise in 2017

* Yields lower on day as traders see weak inflation hindering Fed

(Updates prices, adds comments) NEW YORK, June 14 (Reuters) - U.S. Treasury yields pared declines but remained lower on Wednesday after the Federal Reserve raised interest rates, announced it would begin cutting its holdings of bonds and other securities this year, and forecast one more rate hike in 2017. The Fed's interest rate increase, following a two-day meeting, marked its second this year. Interest rates are seen rising one more time by the end of this year, according to the median projection of the forecasts released with the Fed's policy statement, in keeping with the previous forecast.

Yields rose from earlier levels on the hawkish tone of the statement and the U.S. yield curve flattened, with the difference between short-dated two-year Treasury yields and benchmark 10-year yields narrowing to a difference of 78.58 basis points, the smallest since Sept. 9. While the Fed indicated that a recent softening in inflation was seen as transitory, long- and medium-dated yields remained not far from their lowest levels since November touched earlier, when weak Consumer Price Index and retail sales data for May stoked doubts that the Fed would be able to hike rates in the second half of 2017. Shorter-dated yields also remained lower on the day as traders doubted the Fed's hawkish outlook given the recent soft inflation readings. The Labor Department said earlier Wednesday that its Consumer Price Index (CPI) dipped 0.1 percent in May. The so-called core CPI, which strips out food and energy costs, increased 1.7 percent year-on-year, the smallest rise since May 2015. "The market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data," said Mark Cabana, head of U.S. short rates strategy at Bank of America Merrill Lynch in New York. U.S. 10-year yields were last at 2.138 percent after touching 2.103 percent earlier, their lowest since Nov. 10. U.S. 30-year yields were last at 2.780 percent after touching their lowest since Nov. 9 of 2.765 earlier. U.S. two- and three-year yields were last at 1.343 percent and 1.476 percent, compared to 1.363 percent and 1.505 percent late Tuesday, after tumbling to eight-day lows of 1.290 percent and 1.417 earlier. "Most of the statement and the summary of economic projections was somewhat hawkish," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. "The key takeaway...is that it is really going to depend on the trajectory of inflation."

June 14 Wednesday 3:48PM New York / 1948 GMT Price

US T BONDS SEP7 155-20/32 1-19/32 10YR TNotes SEP7 126-232/256 0-136/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 0.995 1.0114 0.002 Six-month bills 1.0975 1.119 -0.010 Two-year note 99-210/256 1.3432 -0.020 Three-year note 100-20/256 1.4733 -0.032 Five-year note 100-28/256 1.7268 -0.053 Seven-year note 100-76/256 1.9541 -0.065 10-year note 102-28/256 2.1377 -0.069 30-year bond 104-112/256 2.7805 -0.082

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 18.00 -1.75

spread

U.S. 3-year dollar swap 16.50 -1.25

spread

U.S. 5-year dollar swap 8.25 -0.50

spread

U.S. 10-year dollar swap -2.25 0.50

spread

U.S. 30-year dollar swap -37.25 2.75

spread

(Reporting by Sam Forgione; Editing by Nick Zieminski and Diane Craft)