July 12, 2017 / 7:53 PM / 13 days ago

REFILE-TREASURIES-U.S. yields down after testimony from Fed's Yellen

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* Yellen says Fed may not be able to raise rates "all that much"

* U.S. yields fall to multi-week lows.

* U.S. 10-year note auction shows mixed results

By Gertrude Chavez-Dreyfuss

NEW YORK, July 12 (Reuters) - U.S. Treasury yields fell on Wednesday after Federal Reserve Chair Janet Yellen dampened expectations for an interest rate hike later this year and in 2018, as she remained cautious about inflation.

Yields, which move inversely to prices, dropped to three-week lows for the two-year note, while those on three-to-10-year maturities slid to two-week troughs.

In testimony delivered to Congress, Yellen said the Fed would not need to raise rates "all that much further" to reach current low estimates of the neutral fed funds rate.

She did say, though, that the U.S. economy was healthy enough to absorb further gradual rate increases and the slow reduction of the Fed's massive bond portfolio. Yellen also expressed concern about the "somewhat low" wage growth given the Fed's 2 percent inflation target.

"Yellen's congressional remarks reminded traders that inflation's path higher remains an uncertainty in the Fed's rate policy," said Jim Vogel, interest rates strategist at FTN Financial in Memphis, Tennessee.

In late trading, the benchmark 10-year Treasury yield fell to 2.302 percent, its lowest in two weeks, from 2.362 percent late on Tuesday. It was last at 2.319 percent.

At the front-end of the curve, the two-year yield dropped as low as 1.331 percent, a three-week trough, from 1.379 percent late on Tuesday, and last traded at 1.347 percent.

Rate futures indicated a 53 percent chance the Fed would raise key overnight borrowing costs at its December policy meeting, down from 60 percent shortly before the release of Yellen's speech, according to CME Group's FedWatch program.

"A lot is going to depend on how the market reacts to the Fed's announcement of the change in its reinvestment policy," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

"If there is no sort of tantrum after the announcement, then it makes sense to hike rates in December," she added.

The expected pace of hikes in 2018 has declined as well, said TD Securities in a research note, with the market only pricing in one hike between now and the end of 2018.

Also on Wednesday, the U.S. Treasury sold $20 billion in 10-year notes with mixed results. The note fetched a yield of 2.325 percent, compared with expectations of around 2.323 percent.

Bids totaled nearly $49 billion for a bid-to-cover ratio of 2.45, a little below last month's 2.54 but in line with the 2.43 average. Indirect bids, which include those from foreign central banks, were a solid 64.8 percent. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Lisa Von Ahn and Chizu Nomiyama)

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