TREASURIES-U.S. 2-year yields hit 23-month high as Fed funds futures tumble

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By Kevin Buckland

TOKYO, Jan 27 (Reuters) - U.S. Treasury 2-year yields hit a fresh 23-month high in Asian trading on Thursday, after Federal Reserve Chair Jerome Powell flagged an interest rate increase in March and said there is room for further policy tightening without hurting employment.

U.S. 2-year yields, which reflect interest rate expectations, rose as high as 1.1920%, surging above the 1.1640% peak scaled on Wednesday.

Fed funds futures tumbled as investors priced in the risk of five hikes this year, with a better-than 60% chance of rates hitting 1.25% by Christmas. The December Fed funds future contract slid 11.5 ticks, the largest drop in the contract's history.

Powell, in his news briefing after the Federal Open Market Committee (FOMC) held rates steady on Wednesday, said the committee is "of a mind" to raise rates in March, and will "move steadily away" from highly accommodative monetary policy this year.

The five-year Treasury yield rose to a new 25-month top at 1.7010%, outstripping the overnight high at 1.6980%.

Yields on the 10-year note eased though, flattening the so-called yield curve, and last stood at 1.8566%, down from a high of 1.8800% in the previous session.

The closely watched gap between 2-year and 10-year yields narrowed to as little as 66 basis points, the smallest margin since late November.

(Reporting by Kevin Buckland; Additional reporting by Wayne Cole; Editing by Chris Reese and Sherry Jacob-Phillips)