TREASURIES-Yields rise as Fed policy stays in focus

(Adds data, comments from Fed's officials, updates prices) By Karen Brettell NEW YORK, Jan 20 (Reuters) - U.S. Treasury yields rose on Friday as investors considered whether the Federal Reserve is likely to keep raising rates as far as it has indicated, and as investors bet that a recent bond rally was overdone in the short-term. U.S. bond yields dropped to four-month lows on Thursday on expectations that the U.S. central bank will be forced to pivot to a more dovish policy if the U.S. economy enters a recession, as many fear. Weaker than expected data has focused investor attention on the U.S. economy, while the Bank of Japan’s decision on Wednesday not to lift a cap on its bond yields removed some selling pressure on U.S. government debt. The Fed is expected to raise rates by 25 basis points at the conclusion of its two-day meeting on Feb. 1, and investors will be keen for any new signals on what is likely at the U.S. central bank’s March meeting, and beyond. “The expectation or question about the meeting is how they characterize a slower pace,” said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee, noting that the Fed spent more time preparing the market for its shift to 50 basis point hikes from 75 basis point ones, than it has for its subsequent downgrade to 25 basis point increases. Fed funds futures traders are pricing for the benchmark rate to peak at 4.90% in June, up from 4.33% now, even as Fed officials have flagged the rate going above 5%. “Right now the assumption is they go 25 (basis points) in March and then they’re done, and so if the FOMC doesn’t think they are going to be done in March you would anticipate that either the statement or the press conference will inform us," Vogel said. Fed Governor Christopher Waller, one of the leading inflation hawks and an advocate last year of aggressive rate increases, said on Friday that he supports scaling back to quarter-point rate hikes at the Fed's next meeting. Philadelphia Fed President Patrick Harker on Friday repeated his view that it's time to move to a slower pace of rate rises and outgoing Kansas City Fed President Esther George said that the U.S. central bank must be "patient" in waiting to see if the pace of price increases in the services sector are waning. Fed Vice Chair Lael Brainard said on Thursday that the central bank is "probing" for the right level of interest rates to control inflation without tanking employment, but added that the chances of a "soft landing" for the U.S. economy appear to be growing. In December, Fed policymakers as a group signaled the policy rate will need to rise to at least 5.1%. Benchmark 10-year yields were last at 3.482%, after falling to 3.321% on Thursday, the lowest since Sept. 13 and just above its 200-day moving average. The yields have dropped from 3.905% at year-end, and from a 15-year high of 4.338% on Oct. 21. Two-year yields were last 4.183%, after reaching 4.041% on Thursday, the lowest since Oct. 4. Key parts of the yield curve are deeply inverted, reflecting concerns about an imminent recession. The two-year, 10-year curve was last at minus 70 basis points, while the spread between three-month and 10-year yields was at minus 118 basis points. Data on Friday showed that U.S. existing home sales plunged to a 12-year low in December, but declining mortgage rates raised cautious hope that the embattled housing market could be close to finding a floor. January 20 Friday 3:00PM New York / 2000 GMT Price Current Net Yield % Change (bps) Three-month bills 4.5475 4.6619 -0.004 Six-month bills 4.6525 4.8282 0.003 Two-year note 100-31/256 4.1829 0.065 Three-year note 100-24/256 3.8411 0.075 Five-year note 101-98/256 3.5666 0.082 Seven-year note 102-40/256 3.5216 0.086 10-year note 105-76/256 3.4824 0.083 20-year bond 103-24/256 3.7765 0.083 30-year bond 106-64/256 3.6539 0.086 A DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 25.00 -1.50 spread U.S. 3-year dollar swap 13.50 -0.75 spread U.S. 5-year dollar swap 4.50 0.00 spread U.S. 10-year dollar swap -3.75 0.25 spread U.S. 30-year dollar swap -40.00 0.25 spread (Editing by Nick Zieminski)