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