TREASURIES-Bonds mostly gain despite soft 7-yr auction

* Soft 7-yr auction dampens appetite for longer-dated debt

* Stocks head lower; 10-, 30-yr Treasuries little changed

* Spread between 5-yr and 30-yr bonds steepest in 20 years (Recasts, updates prices, adds quote)

By Emily Flitter

NEW YORK, July 29 (Reuters) - U.S. Treasury prices ended mostly higher on Thursday as investors fled the flagging stock market for the safe haven of bonds, blunting the impact of a soft 7-year auction.

Longer-dated Treasuries slipped, while securities in the middle of the yield curve posted slight gains following a wobbly auction of 7-year notes.

The Treasury Department's sale of $29 billion in 7-year notes was the sloppiest of the week's three auctions; its high yield was almost 2 basis points higher than the yield on 7-year notes trading simultaneously in the open market.

At the same time, the spread between 10-year notes and 30-year bonds neared a record wide, reaching 109 basis points, which analysts said pointed to worries about United States' long-term credit-worthiness after a Moody's Investors Services sovereign analyst told Dow Jones Newswires the U.S. government needs to elaborate a credible plan to address its soaring debt in order to maintain its Aaa credit rating. [ID:nN29190063]

"While today's 7-year auction was sloppy, coming on the highs of the last two days and causing a top for the day, the only thing to really talk about today is the yield curve," said RBS interest rate strategist John Briggs in Stamford, Connecticut.

"Outright and curve-related stop-loss selling hit the (30-year) bond hard, and throughout the day the front end out to 7-years rallied as accounts bought the belly and sold their long bonds on pain unwinds," he added.

Investors had been betting the 10-30 spread would not widen past 100 basis points.

A sell-off in 30-year bonds further steepened the Treasury yield curve, with the difference between five- and 30-year yields widening to the broadest in 20 years.

The 30-year Treasury bond US30YT=RR lost 9/32 in price to yield 4.08 percent.

Yet the benchmark U.S. 10-year Treasury note US10YT=RR, was unchanged in price from late on Wednesday and yielding just under 3 percent. Investors were unwilling to bet the 10-year yield would fall much further.

"A lot of individuals at the fixed income side are really nervous about the recent compression in yields," said William Larkin, a fixed income portfolio manager in Salem, Massachusetts. "There's a danger here when you're under 3 percent (in the 10-year note yield). We really need to have a long-term sizable decline in the economy and a very low rates for an extended period for that to make sense."

Traders were expecting the 7-year auction to be warmly received. Instead, its bid-to-cover ratio was lower than recent averages. It was the only auction of the week to tail. For more, click on [ID:N29271958]

The belly of the curve -- composed of 5-year, 7-year and 10-year notes -- was marginally higher following the auction. Stocks, which recently exerted heavy influence on Treasuries price action, were lower for the day.

"It's felt less like there's a big macro theme other than positioning going on," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

"The bid for the front end can be attributed a little bit to a flight to quality as equities have been unable to get out of their own way today."

The 7-year note US7YT=RR rose 7/32 in price for a yield of 2.36 percent, down from 2.40 percent at Wednesday's close.

The 2-year note US2YT=RR rose 1/32 in price and was yielding 0.60 percent. (Additional reporting by Ellen Freilich, Burton Frierson and Richard Leong; Editing by Dan Grebler)