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TREASURIES-Yields plunge after Fed hikes rates, sticks to outlook

* Fed hikes rates for second time in three months * Fed sticks to outlook for two more rate hikes this year * 2-, 3-year yields fall from multiyear highs to 8-day lows * Long-, medium-dated yields also fall (Updates prices, adds analyst comment) By Sam Forgione NEW YORK, March 15 (Reuters) - U.S. Treasury yields plummeted on Wednesday after the Federal Reserve raised interest rates for the second time in three months as expected, but did not flag any plan to accelerate the pace of monetary tightening.

U.S. two- and three-year yields, which are most vulnerable to Fed policy, fell from multiyear highs touched during morning U.S. trading after the Fed said in its policy statement that further rate increases would only be "gradual," with officials sticking to their outlook for two more rate hikes this year and three more in 2018.

The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent marked one of the Fed's most convincing steps yet in the effort to return monetary policy to a more normal footing.

The projections for just two more rate hikes in 2017 was viewed as dovish, however, since JPMorgan economist Michael Feroli and others speculated prior to the decision that an increase to four hikes for the entirety of this year was a possibility.

"Many in the market had positioned for a bit more of a hawkish-sounding Fed in the statement and the (outlook) than was actually delivered," said Mark Cabana, head of U.S. short rates strategy at Bank of America Merrill Lynch in New York.

Fed Chair Janet Yellen said in a press conference following the decision that risks to the global economy were more balanced, but that she expected policy to remain accommodative for some time.

U.S. two- and three-year yields sank to eight-day lows after the statement of 1.303 percent and 1.590 percent, respectively. Those yields had touched their highest since June 2009 and April 2010, respectively, before the statement.

U.S. long- and medium-dated yields also fell, with 30-year and benchmark 10-year yields hitting eight-day lows of 3.094 percent and 2.497 percent, respectively. Seven- and five-year yields hit nine-day lows of 2.296 percent and 2.006 percent, respectively.

"The market was concerned about potential acceleration and, if anything, it was a deceleration in the confidence about the future pace and that’s allowing the bond market to take yields modestly lower right afterwards," said Matt Toms, Chief Investment Officer of fixed income at Voya Investment Management in Atlanta.

Benchmark 10-year Treasuries were last up 26/32 in price to yield 2.500 percent, from a yield of 2.595 percent late Tuesday. Two-year notes were last up 5/32 in price to stand at their session low yield of 1.303 percent, from a yield of 1.380 percent late Tuesday.

March 15 Wednesday 4:30PM New York / 2030 GMT Price US T BONDS JUN7 148-9/32 1-14/32 10YR TNotes JUN7 123-192/256 0-224/25 6 Price Current Net Yield % Change (bps) Three-month bills 0.72 0.7313 -0.044 Six-month bills 0.8625 0.8783 -0.054 Two-year note 99-168/256 1.3034 -0.077 Three-year note 100-26/256 1.5901 -0.094 Five-year note 99-94/256 2.0097 -0.113 Seven-year note 98-216/256 2.3058 -0.108 10-year note 97-204/256 2.5021 -0.093 30-year bond 97-200/256 3.1145 -0.059 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 34.00 1.50 spread U.S. 3-year dollar swap 25.75 0.75 spread U.S. 5-year dollar swap 10.75 1.00 spread U.S. 10-year dollar swap -3.25 0.00 spread U.S. 30-year dollar swap -38.75 -0.50 spread (Reporting by Sam Forgione; additional reporting by Dion Rabouin; Editing by Lisa Shumaker and Diane Craft)