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TREASURIES-U.S. yields rise after sharp fall; investors brace for Fed

Gertrude Chavez-Dreyfuss

NEW YORK, June 19 (Reuters) - U.S. Treasury yields rose on Wednesday, tracking the European market after steep falls the previous day, as investors rebalanced positions ahead of a pivotal decision and statement from the Federal Reserve later in the session. U.S. benchmark 10-year yields on Tuesday fell to their lowest since early September 2017, while 30-year yields hit their weakest since late October 2016, after European Central Bank President Mario Draghi hinted at more stimulus if regional inflation fails to reach its target. "People are mostly position-squaring ahead of the Fed today," said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York. "Everything in some shape or form will change at 2 p.m. when the Fed announces its decision." The Federal Open Market Committee is expected to leave interest rates unchanged, but is likely to change its rate forecasts and alter the language of the accompanying statement to set the stage for future easing. Interest rate futures are still pricing in a 20-percent chance the Fed will cut interest rate on Wednesday, but a much greater possibility of a move in July, analysts said. "With the G20 next week and with what Trump said yesterday on China, I think the Fed will be a little more cautious to cut today knowing that there could be some potential progress with a trade deal," Cantor's Lederer said. U.S. President Donald Trump said on Tuesday he had spoken to Chinese President Xi Jinping and that the two leaders' teams would restart trade talks after a long lull in order to prepare for a meeting at the G20 summit later this month. In morning trading, U.S. 10-year note yields rose to 2.09% from 2.058% late on Tuesday. Yields on U.S. 30-year bonds increased to 2.572% , from 2.552% on Tuesday. At the short end of the curve, U.S. 2-year yields were up at 1.896% from Tuesday's 1.862%. Action Economics said trading has been a little more cautious, with some market participants reconsidering the aggressive rate cuts being priced by the market. "We believe the bond market is too aggressive in pricing in a dovish FOMC, with three 25 basis points in rate cuts expected this year," Action Economics said. "While the Fed is likely to remove the 2020 dot showing a rate hike, we don't expect the median dot to reflect a cut this year or next." Fed officials' median projection on the number of rate increases is commonly referred to as its "dot-plot."

June 19 Wednesday 10:16 AM New York / 1416 GMT

Price Current NetYield % Change

(bps)

Three-month bills 2.1725 2.2209 -0.005Six-month bills 2.14 2.1995 0.003Two-year note 100-111/256 1.8967 0.035Three-year note 99-194/256 1.8337 0.035Five-year note 100-158/256 1.8687 0.038Seven-year note 101-4/256 1.9678 0.03510-year note 102-140/256 2.0888 0.03130-year bond 106-80/256 2.5711 0.019

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 3.00 0.25

spread

U.S. 3-year dollar swap 2.25 0.25

spread

U.S. 5-year dollar swap -1.50 0.00

spread

U.S. 10-year dollar swap -6.00 0.25

spread

U.S. 30-year dollar swap -31.75 0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)