Short-dated yields rise, soft demand for two-year auction

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NEW YORK, Dec 27 (Reuters) - Short-dated Treasury yields edged higher on Monday in light trading conditions as the Treasury sold new two-year notes to soft demand, the first auction of $169 billion in short- and intermediate-dated notes this week.

The notes sold at a high yield of 0.769%, around half a basis point above where they had traded before the auction.

Demand for the debt was likely dented by illiquid conditions with many traders and investors out between the Christmas and New Year's holidays.

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The Treasury will sell $57 billion in five-year notes on Tuesday and $56 billion in seven-year notes on Wednesday. It will also sell $24 billion in two-year floating-rate notes on Wednesday.

Two-year yields were last up 2 basis points at 0.711%. The yields had reached 0.731% on Dec. 10, which was the highest since March 2020. The short-dated debt is highly sensitive to interest rate expectations.

Five-year yields rose 1 basis point to 1.252% while seven-year yields were little changed on the day at 1.411%. Benchmark 10-year yields fell 1 basis point to 1.481%.

Many analysts expect Treasury yields to rise in 2022, with the Federal Reserve expected to begin increasing rates as the economy rebounds from COVID-19-related business shutdowns. Fed fund futures traders are fully pricing in a rate hike by May.

December 27 Monday 3:00PM New York / 2000 GMT

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Reporting by Karen Brettell in New York Editing by Alison Williams and Matthew Lewis

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