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TREASURIES-Yield curve flattens as Fed stays hawkish amid low inflation

* Fed's Rosengren: Low rates are risk to financial stability

* US five-, 30-year yield curve flattest since 2007

NEW YORK, June 20 (Reuters) - The U.S. Treasury yield curve flattened to its lowest levels since December 2007 as more hawkish Federal Reserve officials led intermediate-dated notes to underperform long-term bonds, which are being supported by falling inflation. Boston Fed President Eric Rosengren said on Tuesday that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making. On Monday, New York Fed President William Dudley said halting the rate-hiking cycle now would imperil the economy, and unemployment at 4.3 percent now and inflation at 1.5 percent were "a pretty good place to be. The more the Fed beats in this relentlessly hawkish message, the more the yield curve just ends up flattening on it, said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. The yield curve between five-year notes and 30-year bonds flattened to 107 basis points, the lowest since December 2007. The yield curve has flattened as the Feds hawkishness contrasts with weakening inflation. Data last Wednesday showed that the so-called core Consumer Price Index (CPI), which strips out food and energy costs, increased 1.7 percent year-on-year in May, the smallest rise since May 2015. That measure has fallen from a year-on-year rise of 2.2 percent in February. The Fed has been talking much more hawkishly than the past in the context of the recent data, said Kohli. Its not that the levels are disturbing, its that the trend is really disturbing.

Five-year note yields , which are among the most

sensitive to Fed policy, have jumped to 1.80 percent from a six-month low of 1.67 percent on Wednesday, before the U.S. central bank raised interest rates for the second time in three months.

Thirty-year bond yields , which are most influenced

percent from 2.80 percent after the Feds rate hike last week.

Benchmark 10-year notes were last up 3/32 in

price to yield 2.18 percent, down from 2.19 percent late on Monday.

(Editing by Bernadette Baum)

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