TREASURIES-Short U.S. yields at 1-year highs as curve flattens after Fed

LONDON, June 17 (Reuters) - Short-dated U.S. Treasury yields held at one-year highs on Thursday after Federal Reserve policymakers took markets by surprise by moving up their projections for commencing interest rates hikes to 2023 from 2024.

At the conclusion of its two-day policy meeting, the Fed disclosed that 11 out of 18 officials were projecting at least two quarter-point interest rate increases in 2023 even as the central bank pledged to keep a supportive policy in place to aid the ongoing jobs recovery.

Yields on two-year U.S. Treasuries considered as the most sensitive part of the yield curve to interest rate changes held at 0.2053% after rising to a June 2020 high of 0.2170% in late New York trading.

The sharp selloff in the two-year segment rippled over into five and seven-year maturities with yields on both those segments rising by more than 10 bps, while the longer-end of the curve was slightly higher.

The yield curve measuring the gap between 2-and 30-year yields flattened to its lowest level in 2021 with the spread tightening to 197 bps from a high of 236 bps in March.

Fed funds futures market showed a roughly 90% chance of a rate hike by January 2023. Prior to the Fed statement, the market fully priced in a rate increase by April 2023.

Market analysts believe yields on longer-maturity debt should rise more than their shorter-dated counterparts in the coming days.

"Tapering will come before higher policy rates so in theory the long end should sell off more and this is something to look out for, when the dust around the new plot settles down," said Kenneth Broux, an FX strategist at Societe Generale in London.

But unlike the violent repricing on shorter-dated yields, market gauges for liquidity such as the U.S. swap and cash market spreads remained quiet, signalling no stress in money markets. (Reporting by Saikat Chatterjee; Editing by William Maclean)

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