CORRECTED-TREASURIES-Yields lower before 7-year note auction

 (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
    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
    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
    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       
 U.S. 2-year dollar swap         7.75         0.00    
 U.S. 3-year dollar swap         4.25        -0.25    
 U.S. 5-year dollar swap        -0.75        -1.25    
 U.S. 10-year dollar swap       -4.75        -0.25    
 U.S. 30-year dollar swap      -29.75        -0.25    

 (Editing by Chizu Nomiyama)