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TREASURIES-Yield curve flattest since July on possible December rate hike

* Fed seen as more hawkish than market anticipated

* Philly Fed manufacturing index increases

NEW YORK, Sept 21 (Reuters) - The U.S. Treasury yield curve flattened to two-and-a-half month lows on Thursday as investors adjusted for the likelihood of December interest rate increase, a day after the Federal Reserve struck a more hawkish than expected tone at its September meeting. New economic projections released after the Fed's two-day policy meeting showed 11 of 16 officials see the "appropriate" level for the federal funds rate, the central bank's benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, one-quarter of a point above the current level. "The meeting was definitely more hawkish than what the market was anticipating," said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle. "We were definitely not pricing in another rate hike for this year," Hurley said. Some traders and investors had expected the Fed to strike a more dovish tone given the potential economic impact of recent severe hurricanes and still sluggish inflation. The U.S. central bank was also seen as potentially slowing its rate hike path to give the market time to absorb reductions in its balance sheet. The Treasury yield curve between five-year notes and 30-year

bonds flattened to 92 basis points on Thursday,

the lowest level since July 6. Intermediate-dated debt underperformed on the Fed statement as it is more sensitive than longer dated bonds to interest rate increases.

Benchmark 10-year notes were last up 5/32 in

price to yield 2.26 percent, up from 2.24 percent before Wednesdays Fed statement. Yields briefly rose on Thursday after data showed that manufacturing activity in the mid-Atlantic region accelerated in September amid a surge in new orders.

(Reporting by Karen Brettell; editing by Grant McCool)

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