December 16, 2015 / 8:41 PM / 4 years ago

CORRECTED-TREASURIES-Short-end yields rise sharply after Fed rate increase

(Corrects paratraph 2 to say 5-year yield was at session high after the announcement, not session low)

* Fed raises interest rate

* Curve flattens

* 2-year yield reaches 5-year high

By Tariro Mzezewa

NEW YORK, Dec 16 (Reuters) - Yields on U.S. Treasuries rose on Wednesday after the Federal Reserve increased its benchmark rate by 0.25 percentage point, its first hike in nearly a decade.

Yields on 5-year Treasuries were at their highest for the session following the announcement by the Fed and the yield differential between 5-year notes and 30-year bonds shrank to 125 basis points. The yield on the 2-year note reached a 5-year high of 1.021.

While the rate move had been almost fully priced in, with traders seeing an 81 percent chance of an increase leading into the meeting, according to the CME Group’s FedWatch program, investors were paying close attention to the words used by the central bank to communicate the pace of future hikes.

“The pace of adjustment will affect long rate movements,” said Kevin Giddis, head of fixed income at Raymond James in Memphis, Tennessee.

The increase, which is the first since 2006, is expected by analysts to flatten the yield curve in the coming months.

Traders had been increasing their curve-flattening positions in anticipation of a 2015 rate hike, which involved reducing holdings of short-dated Treasuries and increasing stakes in longer ones.

“This is a gradual flattening, not a big move because most of this is priced in but might change. Long end may hold up better as short end slows in anticipation of future hikes,” said Anthony Valeri, fixed income strategist at LPL Financial in San Diego, California.

U.S. benchmark 10-year Treasury notes were last down 7/32 in price to yield 2.288 percent, up from 2.266 percent late on Tuesday.

The U.S. 30-year bond was last down 10/32 in price to yield 3.00 percent, up from 2.991 percent late Tuesday.

Investors were listening to Chair Yellen’s press conference for more clues about the pace of increases in 2016.

Editing by Meredith Mazzilli and Tom Brown

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