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TREASURIES-Flattening trade pauses before two-year note sale

(Recasts, adds quote, updates prices)

* Long-dated debt underperforms as flattening trades pause

* Treasury to sell $32 bln of two-year notes

* Fed buys $1.15 bln of bonds due 2036-2044

NEW YORK, March 25 (Reuters) - U.S. Treasuries investors pulled back on bets that the Treasuries yield curve will continue to flatten on Tuesday as they prepared for $96 billion in new short- and intermediate-dated debt this week, beginning with a $32 billion sale of two-year notes. Two-year and five-year notes have been the worst performers since Federal Reserve Chair Janet Yellen said last Wednesday that the U.S. central bank could raise interest rates six months after its current bond-buying program ends, suggesting a potential rate hike could happen as early as spring of 2015. Traders now expect that Tuesday's auction of two-year notes will price at yields of around 0.47 percent, likely drawing in new buyers. The yields fell to 0.44 percent in the secondary market, after jumping from around 0.34 percent before Yellen's remarks last week. "There is a reversal of some of the flattening trade that was taking place. ... The belly of the curve got as cheap as it was going to get," said Thomas di Galoma, head of fixed income rates at ED&F MAN Capital Markets in New York. The Treasury will also sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday, in addition to $13 billion in reopened two-year floating rate notes on Wednesday. Demand for low-risk U.S. government debt before quarter-end is seen as likely to help demand in the auctions. Investors were also focused on assessing data this week for signs about the strength of the economy. "We've moved a lot since Yellen's press conference last Wednesday. The flattener is a crowded trade; you are seeing people taking off some positions for event risk," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. On Tuesday, the Commerce Department reported that sales of new U.S. single-family homes hit a five-month low in February, but private-sector data showing consumer confidence surged to a six-year high in March suggested the economy was regaining momentum after being held back by severe weather.

Other major economic releases this week include gross domestic product for the fourth quarter, which will be released on Thursday. Five-year note yields dropped to 1.72 percent on Tuesday, after increasing to 1.77 percent on Monday, the highest level since Jan. 9. Benchmark 10-year notes fell 3/32 in price to yield 2.76 percent, up from 2.74 percent late on Monday, and 30-year bonds dropped 15/32 in price to yield 3.59 percent, down from 3.57 percent. One large flattener trade was seen in U.S. bond futures on the Chicago Board of Trade on Tuesday in spite of the general trend. At 3:05 a.m. (0805 GMT), 9,200 contracts of U.S. two-year Treasury futures traded at 109-22/32 while 5,200 contracts of 10-year bond futures traded at 123-17/32. The Fed bought $1.15 billion in bonds due from 2036 to 2044 on Tuesday as part of its ongoing purchase program.

(Additional reporting by Richard Leong; Editing by Chizu Nomiyama and Leslie Adler)