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TREASURIES-Long bond yields fall as U.S. economic data disappoints

(Adds quote, auction results; updates prices)

* Weak U.S. capital goods data raises economic concerns

* Thirty-year bond yields lowest since November

* Five-year, 30-year yield curve flattest since late 2007

* Treasury sells $26 bln two-year notes to strong demand

NEW YORK, June 26 (Reuters) - Long-dated U.S. Treasury bond yields dropped to seven-month lows on Monday and the yield curve between five-year notes and 30-year bonds fell to its flattest level since 2007 after weak U.S. economic data raised concerns about tepid growth and falling inflation. New orders for key U.S.-made capital goods unexpectedly fell in May and shipments also declined, suggesting a loss of momentum in the manufacturing sector halfway through the second quarter. "The economic data has not been that great," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. At the same time, "people are looking for yield and the front-end is anchored."

Thirty-year bond yields slipped to 2.68 percent,

the lowest since Nov. 9. The difference in yield between five-year notes and 30-year

bonds narrowed to as little as 93 basis points,

producing the flattest yield curve since late 2007. The yield curve has flattened in the past month as Federal Reserve officials including New York Fed President William Dudley indicated that further monetary policy tightening is likely. That has led short- and intermediate-dated debt, which is more sensitive to interest rate changes, to underperform while long bonds have been supported by concerns about tepid growth and falling inflation. "Inflation is the key," said Thomas Simons, a senior money market economist at Jefferies in New York. "Until oil moves meaningfully higher and people start to get convinced that inflation is going to come back, this curve flattening is going to continue." Financial conditions have loosened in the past year despite the Fed raising interest rates three times since December, which is another reason to continue tightening, Dudley said in remarks published on Monday. San Francisco Fed President John Williams said on Monday that a recent slowdown in U.S. inflation was mainly due to one-off factors and should not prevent further increases in rates. Fed Chair Janet Yellen is scheduled to speak on Tuesday. The Treasury sold $26 billion in two-year notes to strong demand on Monday, the first auction of $88 billion in new coupon-bearing debt supply this week. The ratio of bids to the amount of two-year notes offered was 3.03, which the strongest since November 2015.

The notes sold at a high yield of 1.348 percent, which was the highest yield since October 2008. The government will also sell $34 billion in five-year notes on Tuesday and $28 billion in seven-year notes on Wednesday.

(Editing by Meredith Mazzilli and Richard Chang)

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