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TREASURIES-Yields dip after soft U.S. March inflation reading

* U Mich March data shows soft U.S. inflation * Data suggests risk of more dovish Fed * Yields set for biggest weekly drops in three By Sam Forgione NEW YORK, March 17 (Reuters) - U.S. Treasury yields edged lower on Friday after data showing low inflation in March suggested that the Federal Reserve could aim for a slower pace of interest rate hikes this year than it had forecast on Wednesday.

U.S. 30-year and 10-year Treasury yields, which benefit from low inflation since reduced purchasing power erodes their interest payouts, fell about two basis points after preliminary University of Michigan data showing low inflation in early March.

Traders are watching inflation closely for clues on the Fed's path of rate hikes. The Fed disappointed expectations for a more hawkish pace of rate increases when it stuck to its outlook for just two more hikes this year and three more in 2018 following a two-day policymaking meeting on Wednesday.

"The reason for the rates rally in the aftermath was the 5-10 year inflation print which fell to a record low of 2.2 percent, which was the lowest level since the survey started in 1979," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York, in a research note.

Yields remained within recent ranges and did not break below Thursday's session lows. Two-year notes, which are considered most vulnerable to Fed policy, were last up slightly in price to yield 1.313 percent, from a yield of 1.324 percent late Thursday.

The data came after the Fed also raised rates for the second time in three months on Wednesday, as expected. The data, showing slowing inflation, posed a risk to a more hawkish Fed hiking cycle, analysts said.

"A lack of inflationary pressures might restrain the Fed," said Kim Rupert, managing director for fixed income at Action Economics in San Francisco.

Benchmark 10-year Treasuries were last up 7/32 in price to yield 2.499 percent, from a yield of 2.524 percent late Thursday. Those yields hit a 10-day low of 2.486 percent in overnight trading Thursday and were last on track to post their biggest weekly decline in three, of about nine basis points.

Yields on other Treasuries maturing between two and 30 years were also set to post their biggest weekly drop in three weeks, with two-year yields last on track to fall about five basis points for the week.

March 17 Friday 11:12AM New York / 1512 GMT Price US T BONDS JUN7 148-13/32 0-17/32 10YR TNotes JUN7 123-208/256 0-56/256 Price Current Net Yield % Change (bps) Three-month bills 0.725 0.7364 0.002 Six-month bills 0.86 0.8757 0.000 Two-year note 99-164/256 1.3126 -0.011 Three-year note 100-22/256 1.5954 -0.017 Five-year note 99-96/256 2.0083 -0.022 Seven-year note 98-226/256 2.2999 -0.026 10-year note 97-212/256 2.4987 -0.025 30-year bond 97-212/256 3.112 -0.023 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 33.25 0.00 spread U.S. 3-year dollar swap 25.25 0.50 spread U.S. 5-year dollar swap 10.50 0.75 spread U.S. 10-year dollar swap -3.50 0.50 spread U.S. 30-year dollar swap -38.25 1.00 spread (Editing by Bernadette Baum)