U.S. Markets closed

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 (New throughout, updates prices and market activity, adds analyst comment) 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 for clues on the path of the Fed, which after a two-day policy meeting on Wednesday disappointed those who expected a more hawkish pace of rate increases. Instead, it stuck to its outlook for two more hikes this year and three in 2018.

"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 remained above Thursday's session lows. Two-year notes, considered most vulnerable to Fed policy, were last up slightly in price, with the yield slipping to 1.321 percent from 1.324 percent late Thursday.

On Wednesday, the Fed raised rates for the second time in three months, as expected. The data, showing slowing inflation, could discourage a more hawkish hiking cycle, analysts said.

Benchmark 10-year Treasuries were last up 6/32 in price to yield 2.502 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 on track for their biggest weekly decline in three, of about 8 basis points.

Yields on other Treasuries maturing between two and 30 years were set for their biggest weekly drop in three weeks, with two-year yields on track to fall about 4 basis points for the week.

An Opinionway poll showing French presidential candidate Marine Le Pen extended her lead over rival Emmanuel Macron in the first round of the country's election also pushed Treasury yields lower, said Shyam Rajan, head of U.S. Rates Strategy at Bank of America Merrill Lynch in New York. Le Pen leads the anti-European Union, anti-immigration National Front.

March 17 Friday 3:29PM New York / 1929 GMT Price US T BONDS JUN7 148-14/32 0-18/32 10YR TNotes JUN7 123-192/256 0-40/256 Price Current Net Yield % Change (bps) Three-month bills 0.7175 0.7287 -0.005 Six-month bills 0.85 0.8654 -0.011 Two-year note 99-160/256 1.3208 -0.003 Three-year note 100-14/256 1.6061 -0.006 Five-year note 99-80/256 2.0217 -0.008 Seven-year note 98-212/256 2.3085 -0.017 10-year note 97-208/256 2.5005 -0.023 30-year bond 97-208/256 3.1128 -0.022 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 33.50 0.25 spread U.S. 3-year dollar swap 25.50 0.75 spread U.S. 5-year dollar swap 10.25 0.50 spread U.S. 10-year dollar swap -3.25 0.75 spread U.S. 30-year dollar swap -38.00 1.25 spread (Editing by Bernadette Baum and David Gregorio)