TREASURIES-Yields rise as central banks seen more hawkish

(Adds Bank of England, ECB outlook; Updates prices)

* Fed meeting in focus for rate hike signals

* Fed seen likely to announce balance sheet reductions

* Gilt selloff weighs on Treasuries

By Karen Brettell

NEW YORK, Sept 18 (Reuters) - U.S. Treasury yields rose on

Monday as investors prepared for a potentially more hawkish

Federal Reserve at its two-day policy meeting this week, after

the Bank of England surprised investors last week with talk of a

possible rate hike.

The U.S. central bank is widely expected to announce at the

conclusion of its meeting on Wednesday that it will begin paring

its massive portfolio of Treasuries and mortgage-backed

securities, with the reductions likely to start this year.

Less certain is whether the policy-setting Federal Open

Market Committee will raise rates again by the end of the year.

Interest rate futures traders are pricing in a 57 percent chance

of a hike at the December meeting, according to CME Group (Kuala Lumpur: 7018.KL - news) ’s

FedWatch Tool.

"The key market moving event for this week is the FOMC,"

said Subadra Rajappa, head of U.S. rates strategy at Societe

Generale in New York. "The debate in the market is whether the

Fed will be able to raise rates at the December meeting, given

the trajectory of inflation."

Treasury yields have jumped since data on Thursday showed

that U.S. consumer prices accelerated in August, easing concerns

that inflation would disappoint with another weak print.

The Consumer Price Index (CPI) rose 0.4 percent last month,

the largest rise in seven months.

"Last week's CPI number was a step in the right direction.

If we maintain this trajectory during the second half of the

year, then I think they will be well on their way to hiking in

December," Rajappa said.

Concerns about North Korean missile tests have also eased,

helping yields rise from nine-month lows a little more than a

week ago.

Benchmark 10-year notes dropped 8/32 in price to

yield 2.229 percent. The yields had fallen to 2.016 percent on

Sept. 8, the lowest level since Nov. 10.

Weakening British government bonds also put pressure on

Treasuries, after the BoE (Shenzhen: 000725.SZ - news) said on Thursday that it was likely to

raise interest rates in the coming months if the economy and

price pressures keep growing.

"We have seen gilts fall quite considerably and I think we

are just trying to stay up with that," said Tom di Galoma, a

managing director at Seaport Global in New York.

Yields on 10-year gilts have soared to 1.30

percent, from 1.14 percent before the BoE's statement.

The European Central Bank is also expected to announce in

October a six-month extension to its asset purchase programme

but will cut how much it buys each month to 40 billion euros

from January, according to a Reuters poll of economists.

(Editing by Paul Simao; Editing by Chizu Nomiyama)

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