TREASURIES-Bonds fall as recovery hopes fuel risk appetite

* Treasuries lose luster as risk appetite returns

* Treasury yield curve at record steep level

* Longer-dated yields hit four-month highs

* U.S. Q3 GDP revised down; Nov existing home sales jump (Updates market action, adds quote)

By Richard Leong

NEW YORK, Dec 22 (Reuters) - U.S. Treasury debt prices declined on Tuesday as optimism over an economic recovery led investors to favor stocks and riskier assets over safer, low-yielding government debt.

Data showing a surprisingly strong 7.4 percent increase in existing home sales in November fanned hopes that nascent growth would accelerate next year. That news eclipsed government data revising down its third-quarter reading on gross domestic product. For more, see [ID:nN22392364]

The market's increased optimism on the economy in recent days has driven investors to reduce Treasury holdings and raise ownership of stocks and corporate bonds.

This optimism has pushed the Treasury yield curve to record steep levels and long-dated yields to four-month highs.

"If the economy continues to improve, yields will keep rising and fewer people will be willing to buy longer-dated Treasuries," said John Spinello, chief Treasury strategist with Jefferies & Co. in New York.

Adding to the selling pressure, investors have reduced Treasury hedges on their mortgage investments, known as convexity selling, as yields have spiked, analysts said.

The price on benchmark 10-year Treasury notes US10YT=RR was down 17/32 at 96-31/32. The yield, which moves inversely to the price, was 3.75 percent, up 7 basis points on the day.

The 10-year yield touched 3.77 percent, the highest since Aug. 13.

The two-year and 10-year part of the yield curve, or the yield gap between those two maturities, traded at an intraday record wide of 284 basis points, compared with 281 basis points late Monday, according to Reuters data.

"People are viewing the steeper yield curve as a sign that the economy is growing, or at least the building blocks for economic growth are there," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

YEAR-END SUPPLY

Another looming threat for Treasuries will be next week's bond supply. These auctions of two-year, five-year and seven-year notes will mark the last of this year's U.S. government debt issuance.

Analysts predict the government will sell $44 billion in two-year notes, $42 billion in five-year debt, and $32 billion in seven-year notes next week. These amounts would equal to those sold in November.

"That is a lot of supply to underwrite at year-end," Jefferies' Spinello said.

The U.S. Treasury has issued about $2 trillion in debt in 2009, double the amount it sold in 2008. The increased sales raised money for a massive federal stimulus package and various financial bailouts stemming from last year's credit crisis and the ensuing recession.

The U.S. Treasury will announce details on next week's auctions at 11 a.m. (1600 GMT) on Wednesday.

Some analysts said the sell-off in Treasuries is overdone and they are poised for a rebound as bargain-hunting emerges.

In addition to the supply announcement, traders will receive data on Wednesday on new home sales, mortgage application activity, personal spending and income, and consumer sentiment from Reuters/University of Michigan. [ECI/US] (Additional reporting by Chris Reese; Editing by Leslie Adler)