TREASURIES-Yields lower after strong 7-year note auction

 (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)