CASH-Benchmark 10-year yields near 3-year high ahead of likely rate hike

 (Updates prices, adds comments, changes dateline previously
LONDON)
    By Karen Brettell
    NEW YORK, March 16 (Reuters) - Benchmark 10-year U.S.
Treasury yields hit almost three-year highs on Wednesday, hours
before the Federal Reserve was expected to announce its first
interest rate hike in more than three years after a two-day
policy meeting.
    Surging inflation has prompted investors to anticipate the
U.S. central bank, which is due to release its latest policy
statement and new economic projections at 2 p.m. EDT (1800 GMT),
will be aggressive in raising rates and shrinking its balance
sheet in an effort to stem rising price pressures.
    Whether the Fed will be willing to keep tightening if growth
deteriorates, however, will be a key question as inflation digs
into consumer finances and sanctions imposed on Russia after its
invasion of Ukraine add additional headwinds to the inflation
and growth outlook.
    "I think that the market is looking for a decidedly more
hawkish Fed than we’ll ultimately get," said Ian Lyngen, head of
U.S. rates strategy at BMO Capital Markets in New York. "Very
measured and predictable I suspect will be the theme that comes
out of this, as opposed to the Fed suggesting or acknowledging
that they might be behind the curve on inflation."
    Fed officials will update their rate forecasts, known as the
"dot plot," and quarterly economic projections for the first
time since December 2021.
    Lyngen says its unlikely that the "dot plot" will be as
hawkish as the markets expect, with fed funds futures priced for
seven 25-basis-point rate hikes this year.           
    "I find it very difficult to imagine that that's going to be
reflected in the 'dot plot.' Maybe we get five, maybe even six,
but we're not going to get seven, so then the question becomes
how does the market respond to that?” Lyngen said.
    Investors will also be looking for any details on the size
and timing of when the Fed will begin shrinking its $8.9
trillion balance sheet.
    Two-year note yields were last at 1.860%, after
hitting 1.894% on Tuesday, which was the highest level since
Aug. 2019. Benchmark 10-year note yields were at
2.163%, after earlier reaching 2.204%, the highest since May
2019.
    The two-year, 10-year yield curve steepened
one basis point to 30 basis points.
    Traders have priced in more aggressive tightening since
consumer price data last week showed that annual inflation in
February rose at the fastest pace in 40 years at 7.9%, while
data on Tuesday showed that U.S. producer prices surged 10% on
an annual basis during the month, matching the gain in January.

    U.S. retail sales rose moderately in February as more
expensive gasoline, in part, forced households to cut back
spending on other goods, the Commerce Department said on
Wednesday.
    Improving risk sentiment also reduced demand for safe haven
U.S. bonds on Wednesday after China's top policymaker assured
markets of stability and support and helped put a floor under
sectors hurt by a regulatory crackdown.
    Russia and Ukraine also both emphasized new-found scope for
compromise on Wednesday as peace talks were set to resume three
weeks into a Russian assault that has so far failed to topple
the Ukrainian government.
    
      March 16 Wednesday 9:30AM New York / 1330 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.465        0.472     0.008
 Six-month bills               0.85         0.8655    0.015
 Two-year note                 99-80/256    1.8598    0.003
 Three-year note               99-24/256    2.0636    0.012
 Five-year note                98-204/256   2.1321    0.018
 Seven-year note               98           2.1865    0.013
 10-year note                  97-112/256   2.1634    0.003
 20-year bond                  97           2.5683    -0.019
 30-year bond                  95-56/256    2.4772    -0.026
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        23.50         1.50    
 spread                                               
 U.S. 3-year dollar swap        14.00         1.00    
 spread                                               
 U.S. 5-year dollar swap         8.75         0.25    
 spread                                               
 U.S. 10-year dollar swap        9.50         0.50    
 spread                                               
 U.S. 30-year dollar swap      -22.50         2.25    
 spread (Additional reporting by Dhara Ranasinghe in London
Editing by Paul Simao)