December 26, 2017 / 2:30 PM / a year ago

TREASURIES-Two-year U.S. Treasury yields highest since 2008 before supply

    * Treasury to sell $88 billion coupon-supply this week
    * U.S. expected to increase auction sizes in 2018
    * Trading conditions thin after Christmas holiday

    By Karen Brettell
    NEW YORK, Dec 26 (Reuters) - Two-year U.S. Treasury yields
rose to nine-year highs on Tuesday as investors focused on new
supply that will be sold into light trading conditions this
week, and on large increases in issuance expected in 2018.
    The United States will sell $26 billion in two-year notes on
Tuesday, the first sale of $88 billion in new short- and
intermediate-dated coupon supply this week.
    It will be sold into relatively illiquid conditions with
many traders and investors away after Monday's Christmas
    At the same time, investors are preparing for the U.S.
government to increase auction sizes next year for the first
time since 2008 to make up for declining purchases by the
Federal Reserve.
    "The short-end has been too low for most of this month in
terms of yield," said Jim Vogel, an interest rate strategist at
FTN Financial in Memphis, Tennessee. "We think that's going to
take another move up once January gets here and people start
concentrating on additional Treasury supply."
    The Treasury is expected to initially concentrate increases
in supply in short- and intermediate-dated notes.
    Two-year Treasury yields            rose as high as 1.916
percent on Tuesday, the highest since Oct. 14, 2008. Five-year
note yields            rose as high as 2.263 percent, the
highest since April 12, 2011.
    The Treasury Department will sell $34 billion in five-year
notes on Wednesday and $28 billion in seven-year notes on
Thursday. It will further auction $13 billion in two-year
floating-rate notes on Wednesday.
    Short- and intermediate-dated debt is also highly sensitive
to interest rate hikes, which can send their yields higher.
    The Fed has indicated that an additional three increases are
likely next year, though interest rate futures traders are
pricing in only two.

 (Reporting by Karen Brettell; Editing by Will Dunham)
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