TREASURIES-Prices gain as Fed more dovish than expected

(Adds comments from Yellen, updates prices)

* 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 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 note any inflation

concerns, and kept its statement little changed from the one it

issued after its previous meeting.

"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.

Fed Chair Janet Yellen said after the statement that recent

data is "noisy," adding that "inflation is evolving in line with

the committee's expectations".

Bonds gained before the statement, and the yield curve

steepened, with traders attributing much of the move to

investors covering bearish bond bets.

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 weakened immediately after the statement 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 five-year notes and 30-year bonds

steepened back to 172 basis points, near where it

had traded before the statement.

The Fed hinted at a slightly faster pace of interest rate

increases starting next year, but suggested rates in the long

run would be lower than it had indicated previously.

The central bank slashed its economic growth forecast to a

range of between 2.1 percent and 2.3 percent from an earlier

forecast of around 2.9 percent, but it 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.

On Thursday, the Fed will buy between $2.25 billion and

$2.75 billion in notes due from 2021 to 2024.

(Additional reporting by Rodrigo Campos; Editing by Nick

Zieminski; and Peter Galloway)