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TREASURIES-Yields higher after Fed keeps rates pinned down

Ross Kerber

(Recasts and updates with market activity after Fed statement, analyst comment) By Ross Kerber Sept 16 (Reuters) - Investors on Wednesday pushed longer-term U.S. Treasury yields to their highest levels this week and steepened the yield curve after the U.S. Federal Reserve said it would keep interest rates near zero for some time. As expected, the Fed promised to keep rates near zero until inflation is on track to "modestly exceed" the U.S. central bank's 2% inflation target. The change in guidance was part of a policy shift announced last month. The Fed's stance drove down prices and drove up yields on Treasuries, especially on longer-term bonds whose value is more sensitive to inflation expectations. The benchmark 10-year yield was at 0.6887% in afternoon trading, a basis point higher for the day, and reached as high as 0.702% at one point in the afternoon. The 30-year bond was up 1.7 basis points at 1.4466%. Justin Hoogendoorn, head of fixed income strategy for Piper Sandler, said the Fed appeared to convince at least some traders its plan to stimulate inflation was on track. "The near-term reaction is the market believing" in the Fed's effectiveness, he said. U.S. consumer spending appeared to slow in August as extended unemployment benefits were cut for millions of Americans, offering more evidence that the economic recovery from the COVID-19 recession was faltering. U.S. stocks added to earlier gains after the release of the statement before trending lower as Fed Chair Jerome Powell spoke at an afternoon news conference, with the S&P 500 index last down 0.1% and the Nasdaq falling 0.8%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 55 basis points, about three basis points higher than where it stood at one point in the morning and well above its level of 33 basis points reached on July 24. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down less than a basis point at 0.137%. September 16 Wednesday 3:30PM New York / 1930 GMT Price Current Net Yield % Change (bps) Three-month bills 0.11 0.1116 0.000 Six-month bills 0.115 0.1167 0.000 Two-year note 99-250/256 0.137 -0.002 Three-year note 99-228/256 0.1616 0.000 Five-year note 99-224/256 0.2754 0.006 Seven-year note 100-56/256 0.468 0.007 10-year note 99-100/256 0.6887 0.010 20-year bond 98-56/256 1.2261 0.017 30-year bond 98-68/256 1.4466 0.017 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.00 0.00 spread U.S. 3-year dollar swap 6.75 0.00 spread U.S. 5-year dollar swap 5.25 -0.50 spread U.S. 10-year dollar swap 0.00 -0.50 spread U.S. 30-year dollar swap -37.25 -1.00 spread (Reporting by Ross Kerber in Boston Editing by Nick Zieminski and Chizu Nomiyama)