(Adds auction results, quote, updates prices) By Karen Brettell NEW YORK, Dec 26 (Reuters) - U.S. Treasury yields fell on Thursday after the Treasury Department sold $32 billion in seven-year notes to strong demand, with volumes light as many traders and investors were away after Wednesday’s Christmas Day holiday. The notes sold at a high yield of 1.855%. The auction comes after the U.S. government also 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. "It was very strong demand," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. "As we’ve traded to the upper end of the range in recent weeks it feels like there is demand for Treasuries," Lederer said. Seven-year yields have increased to 1.83% from a three-year low of 1.41% on Sept. 3 as risk appetite improved on optimism of a trade deal between China and the United States. 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 1:30PM New York / 1830 GMT Price Current Net Change (bps) Yield % Three-month bills 1.55 1.582 0.003 Six-month bills 1.565 1.6037 -0.005 Two-year note 99-254/256 1.629 -0.010 Three-year note 99-244/256 1.6412 -0.014 Five-year note 100-38/256 1.7189 -0.018 Seven-year note 98-180/256 1.8251 -0.012 10-year note 98-176/256 1.8962 -0.012 30-year bond 101 2.3283 -0.010 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.25 0.50 spread U.S. 3-year dollar swap 5.00 0.50 spread U.S. 5-year dollar swap -0.25 -0.75 spread U.S. 10-year dollar swap -4.50 0.00 spread U.S. 30-year dollar swap -30.00 -0.50 spread (Editing by Chizu Nomiyama and David Gregorio)
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