* U.S. durable goods data weaker than forecast * U.S. new home sales rise, lift yields * U.S. 2-year note auction draws weak demand (Recasts, adds U.S. auction results, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Dec 23 (Reuters) - U.S. Treasury prices fell, pushing yields higher, in thin trading on Monday as increased risk appetite boosted shares on Wall Street to record highs on more trade optimism and after a lackluster U.S. two-year note auction. U.S. yields tracked equities higher, although their rise was much more modest than that of stocks. Equities were bolstered after President Donald Trump over the weekend said the United States and China would "very shortly" sign their so-called Phase 1 trade pact, which was announced earlier this month. A poorly received $40 billion two-year note auction also weighed on Treasury prices, propelling yields higher. Treasury prices had cheapened going into the auction. There were about $92 billion in bids for a 2.30 bid-to-cover ratio, the lowest since December 2008, reflecting weak demand. The indirect bid, which includes bids from financial institutions and foreign central banks, slid to 46.3%, compared with 47.8% at the previous two-year note auction last month and the 48.8% average. Analysts said the tepid auction results were not a surprise given the market's thin volume ahead of the holidays, but there were some expectations of a better outcome given the sell-off in Treasuries and the flattening of the yield curve. "The rest of the curve sits comfortably in the range of the last four sessions," said Jim Vogel, senior rates strategist at FHN Financial in Memphis, Tennessee. "The sudden sell-off at the longer end of the curve... was on very light volume." The Treasury will next auction $41 billion in 5-year notes on Tuesday, and $32 billion in 7-year notes on Thursday. A weaker-than-expected U.S. durable goods report for November pushed yields a little lower earlier in the session. The details of the report, though, were not as soft as the headline suggested, lifting yields off their lows. Overall, trading is expected to slow this holiday-shortened week as market participants square up positions going into year-end. "People would want to lock in their positions over the next week or two," said Stan Shipley, fixed-income strategist at Evercore ISI in New York. "You really don't want to destroy the good returns you have this year by taking an outside bet." So far this year, the ICE Bank of America Merrill Lynch U.S. Treasury Index, a gauge of the market's performance, is up nearly 7%. In afternoon trading, U.S. 10-year yields rose to 1.934% from 1.917% late on Friday, while those on U.S. 30-year bonds were at 2.362%, up from 2.346% on Friday. Yields also rose after data showed U.S. new home sales rebounded 1.3% to a seasonally adjusted annual rate of 719,000 units last month. Following the auction, U.S. two-year yields were up at 1.656%, from Friday's 1.629%. The yield curve flattened for a second straight session on Monday, with the spread between the two-year and 10-year note yields narrowing to 27 basis points. Ahead of the year-end, market participants sought to unwind steepening trades put on over the last two weeks as U.S.-China trade concerns eased. December 23 Monday 3:07 PM New York/2007 GMT Price Current Net Yield % Change (bps) Three-month bills 1.5425 1.574 -0.005 Six-month bills 1.56 1.5983 0.023 Two-year note 99-181/256 1.6543 0.025 Three-year note 99-214/256 1.6817 0.022 Five-year note 98-210/256 1.7505 0.021 Seven-year note 98-120/256 1.8613 0.017 10-year note 98-96/256 1.9312 0.014 30-year bond 100-92/256 2.3581 0.012 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 -0.25 spread U.S. 3-year dollar swap 3.25 0.25 spread U.S. 5-year dollar swap -0.25 0.25 spread U.S. 10-year dollar swap -4.50 0.00 spread U.S. 30-year dollar swap -29.50 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Andrea Ricci)
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