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TREASURIES-Prices drop after Yellen sees rate hike more likely

(Recast with market move, adds Fischer comments, updates

prices)

* Yellen seen more hawkish, but noncommittal

* Two-year, 30-year yield curve flattest since 2007

By Karen Brettell

NEW YORK, Aug 26 (Reuters) - U.S (Other OTC: UBGXF - news) . Treasuries prices fell on

Friday as investors evaluated whether the Federal Reserve is

likely to raise interest rates at its September meeting,

following hawkish but still noncommittal comments by Fed Chair

Janet Yellen.

Speaking at a three-day international gathering of central

bankers in Jackson Hole, Wyoming, Yellen said the "U.S. economy

was nearing the Federal Reserve's statutory goals of maximum

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employment and price stability."

She (Munich: SOQ.MU - news) did not indicate when the U.S. central bank might raise

rates.

Yellen's comments "lean slightly hawkish, but is it a

commitment? No, it's just maintaining optionality," said

Gennadiy Goldberg, an interest rate strategist at TD Securities

in New York.

Benchmark 10-year notes were last down 6/32 in

price to yield 1.60 percent, up from 1.56 percent before the

comments.

Yields initially rose to 1.60 percent on Yellen's more

hawkish tone, before moving in the opposite direction and

dropping as low as 1.53 percent.

Bonds then resumed weakening after Fed Vice Chair Stanley

Fischer said that Yellen's speech was consistent with

expectations for possible interest rate hikes this year.

The yield curve between two-year notes and 30-year bonds

flattened to 142 basis points, the flattest since

2007.

Investors were searching for new signals over whether an

increase is on the table at the Fed's September meeting after

other Fed officials including New York Fed President William

Dudley said it was a possibility.

"September is not probable, but it's certainly possible,"

said Guy LeBas, chief fixed income strategist at Janney

Montgomery Scott in Philadelphia.

"Right now, the market has a September 25 basis point hike

priced in with about one-in-four probability, and I think in

light of those comments the true number should be closer to

fifty-fifty, and December should be north of 50 percent," LeBas

said.

A hike at the Fed's December meeting is seen as most likely

if the U.S. central bank raises rates this year.

Bonds had been unchanged earlier on Friday after data showed

that U.S. economic growth was a bit more sluggish than initially

thought in the second quarter as businesses aggressively ran

down inventories of unsold goods, offsetting a spurt in consumer

spending.

Gross domestic product expanded at a 1.1 percent annual

rate, the Commerce Department said on Friday in its second

estimate of GDP. That was slightly down from the 1.2 percent

rate reported last month.

(Editing by Chizu Nomiyama and Nick Zieminski)