TREASURIES-Short-dated U.S. yields tick higher on rate-hike bets

* Two-year yield near highest since mid-March

* Fed's Bullard, Williams see rate hikes later in 2016

* Doubts remain whether Fed will raise rates in June

* U.S (Other OTC: UBGXF - news) . to sell $88 bln in 2-year, 5-year, 7-year debt (Updates market action, adds quote)

By Richard Leong

NEW YORK, May 23 (Reuters) - Short-dated U.S. Treasury yields rose on Monday, with the two-year yield hovering at its highest in two months, as traders bet the Federal Reserve may raise interest rates as early as June if the economy shows further improvement.

This view on a looming rate hike was reinforced by comments from top Fed officials following the release of minutes on the central bank's April policy meeting last Wednesday. The record of the meeting surprised investors as it suggested policymakers were prepared to increase policy rates next month.

Prior to the minutes, traders had reckoned there was nearly no chance the Fed would raise rates in June.

"The market has finally got the message," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey. "The minutes shook up the market as the Fed is preparing it for a rate hike."

St. Louis Fed President James Bullard said higher expectations on a rate increase is "probably good," while San Francisco Fed chief John Williams said a forecast for two to three rate hikes in the rest of 2016 is "about right."

Some analysts, however, doubted the Fed would carry through with a rate hike in June, a little more than a week before a referendum on whether Britain would stay in the European Union.

"They don't want to unleash their own volatility. They want to be cautious on that front," said Dimitri Delis, senior econometric strategist at Piper Jaffray in Chicago.

U.S. interest rates futures suggested on Monday traders saw a 31 percent chance of a June rate rise, compared with about 4 percent a week earlier, Reuters data showed.

The two-year Treasury yield hit 0.905 percent, nearing the two-month peak of 0.920 percent set last Thursday.

Benchmark 10-year Treasury notes were up 4/32 in price with a yield of 1.835 percent, down 1 basis point from Friday.

The yield spreads between short- and long-dated Treasuries shrank as traders favored longer-dated issues if the Fed were to raise short-term rates faster than they had anticipated.

The gap (NYSE: GPS - news) between two-year and 30-year yields shrank to 1.72 percent, the tightest since December 2008 after the Fed adopted a near-zero rate policy to combat a recession, according to Tradeweb.

Shorter- and medium-dated Treasuries faced additional pressure as investors made room for $88 billion in two-year notes, five-year debt and $28 billion in seven-year notes. (Reporting by Richard Leong; Editing by Bernadette Baum and Meredith Mazzilli)