TREASURIES-Prices gain as Fed more dovish than expected

(Recasts, adds quotes, updates prices)

* Prices gain as Fed more dovish than expected

* Short covering seen fueling rally, 2-year notes 'special'

* Yield curve steepens, intermediate debt outperforms

* Fed to buy $2.25 bln-$2.75 bln notes 2021-2024 Thursday

By Karen Brettell

NEW YORK (Frankfurt: HX6.F - news) , June 18 (Reuters) - U.S. Treasuries prices gained

on Wednesday, after the Federal Reserve took a more dovish

stance on monetary policy than some had expected at its June

meeting, a day after data showed that inflation pressures are

rising.

Prices had tumbled on Tuesday after a higher-than-expected

consumer price inflation indicator led investors to prepare for

the possibility that the Fed will be open to raising rates

sooner than some had thought.

But the U.S. central bank didn't play up the inflation

increase and kept its statement little changed from its previous

meeting, helping bond prices gain.

"There were a lot of people that thought there would be a

lot more mention of inflation there, that there would have been

a more hawkish tone, but on balance it came out fairly dovish,"

said Aaron Kohli, an interest rate strategist at BNP Paribas (Milan: BNP.MI - news) in

New York.

Bonds gained before the statement, and the yield curve

steepened, with traders attributing much of the price move to

investors covering bearish bets that bonds are likely to weaken.

Two-year notes traded "special" on Wednesday, or at negative

interest rates, in the repurchase agreement market (repo),

indicating a number of investors were short the notes.

"We're seeing a little bit of short covering," said Jason

Rogan, a managing director in Treasuries trading at Guggenheim

Securities in New York.

Treasuries erased price gains immediately after the

statement was released in choppy trading, before resuming their

rally.

"The statement itself was utterly predictable," said Brian

Jacobsen, chief portfolio strategist, investments group at Wells

Fargo Funds Management in Menomonee Falls in Wisconsin. "More

interesting was the timing as far as when they will start

raising rates. There was an ever so slight shift to being more

dovish."

Benchmark 10-year notes gained 12/32 in price to

yield 2.61 percent, just lower than before the statement.

Five-year notes rose 7/32 in price to yield 1.71

percent, little changed from before the statement.

The yield curve between 5-year notes and 30-year bonds

steepened back to 171 basis points, where it had

traded before the statement.

The Fed hinted at a slightly faster pace of interest rates

increases starting next year, but suggested rates in the

long-run would be lower than it had indicated previously.

The central bank slashed its forecast for U.S. economic

growth to a range of between 2.1 percent and 2.3 percent from an

earlier forecast of around 2.9 percent, but expressed confidence

the recovery was largely on track.

It also reduced its monthly asset purchases from $45 billion

to $35 billion a month, divided between $20 billion of Treasury

securities and $15 billion of mortgage-backed debt, as widely

expected.

The Fed will buy between $2.25 billion and $2.75 billion in

notes due from 2021 to 2024 on Thursday.

(Additional reporting by Rodrigo Campos; Editing by Nick

Zieminski)