MONEY MARKETS-Investors now pricing for Jan 2012 rate hike

  * Fed funds futures pricing in rate hike for January 2012
  * Two-year yields trade at highest since May 2010
  * Two-year yields could reach 1.18 pct on higher rate risk
 By Karen Brettell
 NEW YORK, April 1 (Reuters) - A chorus of Hawkish Federal
Reserve officials has led Treasuries investors to bring
forward their expectations of when the U.S. central bank will
begin raising benchmark interest rates, though the market is
not yet expecting rates to rise this year.
 Federal funds futures indicate that traders are now
pricing for an interest-rate hike in January, sooner than
expectations yesterday that the Fed would be on hold until
February.
 Recent weakness in two-year Treasury notes, relative to
benchmark 10-year Treasuries, also suggest that the market is
expecting rate hikes may start sooner than previously
expected.
 "We're definitely seeing the market pricing for a more
hawkish Fed, especially with the front end selling off and the
eurodollar curve steepening," said Michael Chang, interest-
rate strategist at Credit Suisse in New York.
 Two-year notes are seen as most vulnerable to
underperformance from interest-rate risk. These yields rose as
high as 0.90 percent on Friday, the highest level since last
May, and have jumped from 0.51 percent earlier this month. the
last traded at yields of 0.83 percent.
 Minneapolis Fed President Narayana Kocherlakota gave some
of the most hawkish comments so far on Thursday when he said
the central bank may need to raise rates by three-quarters of
a percentage point by the end of 2011 to counter inflation.
 He made the statements to the Wall Street Journal.
 If investors start pricing in the risk of rates rising
this year, two-year note yields would likely climb to the 1.18
percent area, which is also a key technical support, Chang
said.
 "The market's definitely not there yet," Chang said.
 Whether it will get there will depend on whether the
economy continues to improve at a strong pace.
 Federal Reserve officials are seen likely to be
increasingly divided between those who see rate hikes as
necessary to counter inflation, and others who are focused on
improving, but still high, unemployment.
 "The doves are holding fast to looking at employment as
their key indicator, in that they will need to see employment
go into the low 8 percent area before they will move," said
Marcus Huie, interest-rate strategist at Deutsche Bank in New
York.
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 To see a graph on U.S. unemployment, go to
http://r.reuters.com/mab88r
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 Data on Friday showed that the jobless rate fell to a
two-year low of 8.8 percent in March.
 New York Fed President William Dudley, warned, however,
that further improvement is still needed.See [ID:nN01172677]
"It's not inconceivable that we could get there by the end
of the year if the unemployment rate is cut by 0.1 percent
every time," Huie added. "However there is fragility, and
Dudley underlines the fragility of the recovery."
 (Editing by Jan Paschal)


MONEY MARKETS-Investors now pricing for Jan 2012 rate hike