December 14, 2016 / 8:26 PM / 8 months ago

TREASURIES-U.S. shorter-dated yields hit multi-year highs after rate projections raised

(Updates to include analysts quotes, more data)

By Dion Rabouin

Dec 14 (Reuters) - Shorter-dated U.S. Treasury yields rose to their highest point in more than five years after the release of the Federal Open Market Committee's rate decision and statement on Wednesday in which the Fed announced a 0.25 percentage point increase to U.S. overnight interest rates.

Yields on two-year Treasury notes rose to their highest level since August 2009, while three-year yields hit their highest since May 2010 and five-year yields rose to their highest since May 2011.

The FOMC also said it was expecting to raise rates three times in 2017, an increase from the Federal Reserve's September meeting at which the committee said it foresaw two increases.

The increase by 25 basis points to 0.5-0.75 percent was largely expected but the increase of the Fed's so-called dot plot caught the market slightly off-guard, analysts said, leading to the selloff in shorter-dated maturities.

"That was a little bit more hawkish than we expected and it looks like the market is taking that in stride as well," said Collin Martin, director, fixed income at the Schwab Center for Financial Research in New York. "It's a little bit more bearish for the Treasury market than we had anticipated and we're seeing that with yields across the curve up a few basis points."

Shorter-dated maturities are the most vulnerable to action by the Federal Reserve as an increase in U.S. overnight interest rates reduces their value most immediately.

The FOMC's longer term projections were little changed, leading to less selling of Treasuries with longer-dated maturities.

"Changing the near-term means you are more certain that you will have a little more rope to go," said Aaron Kohli, interest rate strategist at BMO Capital Markets in New York. "They didn't move any of the longer-term stuff so maybe that confidence isn't supremely high but certainly it's improving for them."

U.S. two-year Treasury notes were last down 4/32 in price to yield 1.238 percent, an increase of more than 8 basis points from its late Tuesday levels. The three-year note dropped 7/32 in price to yield 1.527 percent, a gain of around 9 basis points. The five-year note fell 13/32 in price for a 1.984-percent yield, 9 points higher.

Benchmark 10-year Treasury notes dropped 10/32 in price to yield 2.499 percent, a little more than 4 basis points above its late Tuesday mark and the highest since September 2014. (Reporting by Dion Rabouin; Editing by James Dalgleish and Bill Trott)

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