(Corrects size of 7-year auction in first paragraph) By Karen Brettell NEW YORK, Dec 26 (Reuters) - U.S. Treasury yields edged lower on Thursday before the Treasury Department is due to sell $32 billion in seven-year notes, with volumes light as many traders and investors were away after Wednesday’s Christmas Day holiday. The auction comes after the U.S. government saw strong demand for a $41 billion sale of five-year notes on Tuesday and slightly soft interest in a $40 billion two-year note sale on Monday. The auction is the last major event this week with no major economic releases scheduled. Investors are also focused on whether there will be strains in the overnight funding markets, with banks expected to pare risk taking for year-end. The New York Federal Reserve has been injecting liquidity into the repurchase agreement (repo) market in order to reduce the chance of funding strains, after a flareup in September sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. The Fed's repo operations, however, are made only with major dealers, with the banks in turn passing liquidity on to their clients. This could lead some clients struggling to raise funds over the year-end period if banks cut back lending. December 26 Thursday 9:04AM New York / 1404 GMT Price Current Net Change (bps) Yield % Three-month bills 1.55 1.582 0.003 Six-month bills 1.5775 1.6166 0.008 Two-year note 99-253/256 1.631 -0.008 Three-year note 99-242/256 1.6439 -0.011 Five-year note 100-34/256 1.7222 -0.015 Seven-year note 98-170/256 1.8312 -0.006 10-year note 98-168/256 1.8997 -0.008 30-year bond 100-232/256 2.3327 -0.005 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.75 0.00 spread U.S. 3-year dollar swap 4.25 -0.25 spread U.S. 5-year dollar swap -0.75 -1.25 spread U.S. 10-year dollar swap -4.75 -0.25 spread U.S. 30-year dollar swap -29.75 -0.25 spread (Editing by Chizu Nomiyama)
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