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TREASURIES-Treasury yields see-saw as Fed to 'soon' reduce bond buying

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(Adds remarks, new record in reverse repo facility) By Herbert Lash NEW YORK, Sept 22 - U.S. Treasury yields see-sawed on Wednesday after the Federal Reserve said it would reduce its monthly bond purchases "soon" and investors grappled with a timeline that suggested higher interest rates may follow more quickly than expected. In the Fed's economic projections and policy statement, nine of the U.S. central bank's 18 policymakers projected borrowing costs will need to rise next year. Analysts said the moves represented a hawkish tilt with a November taper announcement most likely. After a bit of nerves over Fed Chair Jerome Powell's remark that the tapering of bond purchases will end in the middle of next year, the market decided to take that hawkish pace in stride, said Lee Ferridge, North American head of multi-asset strategy at State Street Global Markets in Boston. "This was a more hawkish message from the Fed, but it's a future hawkish message. It's not a hawkish message today. We didn't start to taper," he said. Yields on the 10-year Treasury note had a more nuanced move than stocks, which rose in a risk-on rally, Ferridge said. Without a visible rate hike in the near future, yields didn't need to move higher, he said. The yield on 10-year Treasury notes fell, rose and fell again in choppy trade. The benchmark note was last down 2 basis points at 1.304%, while yields at the longer end fell further. After the statement from the Federal Open Market Committee (FOMC), the Fed funds market fully priced in a rate hike by January 2023, moving projected rate hikes forward by a month. The Fed indicated it sees inflation running this year at 4.2%, more than double its target rate. Joseph LaVorgna, chief economist for the Americas at Natixis, said Powell and other key policymakers are considered dovish, casting doubt on the hawkish stance suggested in the economic projections and Powell's remarks. "I don't think the Fed's tightening is going to be anywhere near as hawkish as they anticipate. It's going to be hard for them to execute on this plan as the economy slows next year," LaVorgna said. Yields earlier held steady as fears of imminent contagion from China Evergrande receded. The People's Bank of China injected 90 billion yuan into the banking system, soothing fears of financial fallout from a default by the debt-laden Chinese property developer. The Fed's reverse repo facility, which offers approved money managers the option to lend money overnight to the U.S. central bank in return for Treasury collateral, set a record $1.283 trillion on Wednesday. The FOMC during its meeting raised the counterparty limit in overnight reverse repurchase agreements to $160 billion effective Sept. 23, from the current $80 billion, the New York Federal Reserve said in a statement. The financial system is awash in trillions of dollars of bank reserves, which are rising in part because of the Fed's asset purchases, a drop in Treasury issuance and a drawdown in the government's store of funds at the Fed. The gap between five-year notes and 30-year bonds fell below 100 basis points after the Fed statement to its lowest level since July 2020. A narrower gap is a possible indicator of factors like economic uncertainty, easing inflation concerns and anticipation of tighter monetary policy. The market consensus had expected the Fed as early as November to begin to reduce its Treasury purchases by $10 billion a month and mortgage-backed security purchases by $5 billion a month. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 106.2 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.4 basis points at 0.240%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.429%. The 10-year TIPS breakeven rate was last at 2.277%, indicating the market sees inflation averaging about 2.3% a year for the next decade. September 22 Wednesday 4:44PM New York / 2044 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0325 0.033 0.008 Six-month bills 0.0425 0.0431 -0.003 Two-year note 99-199/256 0.2403 0.024 Three-year note 99-170/256 0.4888 0.037 Five-year note 99-128/256 0.8536 0.025 Seven-year note 100 1.125 0.002 10-year note 99-128/256 1.304 -0.020 20-year bond 99-224/256 1.7574 -0.049 30-year bond 104-80/256 1.8125 -0.044 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.25 0.00 spread U.S. 3-year dollar swap 12.00 0.00 spread U.S. 5-year dollar swap 10.25 0.00 spread U.S. 10-year dollar swap 2.50 0.25 spread U.S. 30-year dollar swap -24.25 0.50 spread (Reporting by Herbert Lash, additional reporting by Gertrude Chavez-Dreyfuss in New York and Karen Pierog in Chicago; Editing by Will Dunham, Leslie Adler and Sonya Hepinstall) 

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