TREASURIES-Supply wave pushes up US 10-year yield to 4.0 pct

* "Sloppy" auction pummels bonds

* 10-year yields at 4 pct for first time since October

* 30-year Treasury auction set for Thursday (updates after 10-year yields hit four percent, adds quote)

By Burton Frierson

NEW YORK, June 10 (Reuters) - U.S. Treasury prices fell on Wednesday, sending benchmark yields to 4.0 percent for the first time in eight months, after an auction of 10-year notes heightened concerns over the burgeoning U.S. budget deficit.

It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.

Overall demand and a key proxy for foreign interest were both robust, but the high yield at the auction was above market expectations.

This "tail," as it is known in the market, showed investors wanted the government to pay a premium to get the bonds sold and tipped the balance for a negative interpretation of the sale.

"I thought the auction was sloppy," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. in Seattle.

"At this point the path of least resistance is down," Hurley added.

The existing 10-year Treasury note US10YT=RR was down as much as a full point in the immediate wake of the auction and during the afternoon. However, it was last trading down 20/32, yielding 3.95 percent, versus 3.87 percent at Tuesday's close.

Before the auction it was down 19/32, yielding 3.94 percent.

The 30-year long bond US30YT=RR was down more than two full points in the immediate wake of the auction but later trimmed those losses a bit. It was last down 1-20/32, yielding 4.77 percent versus 4.66 percent at Tuesday's close.

The $19 billion 10-year auction was the second installment of a total of $65 billion worth of coupon securities set to come to market this week.

Long bonds will have their turn under the spotlight on Thursday, when the government auctions $11 billion in 30-year debt.

Bonds derived little benefit from a Federal Reserve report showing U.S. economic conditions were weak or got worse through May, though safe-haven government debt would normally firm on such news. [ID:nWEQ001087]

Two-year notes US2YT=RR were down 3/32, pushing yields up to 1.36 percent from 1.31 percent on Tuesday.

The more bonds lose ground, the more investors are likely to wonder whether the Federal Reserve will increase its current $300 billion program of buying Treasuries, which it launched in March to keep credit conditions loose throughout the recession-bound economy.

As part of that campaign, the Fed bought $3.5 billion of Treasuries maturing from 2019 to 2026 on Wednesday.

(Additional Reporting by Ellen Freilich)