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TREASURIES-Prices gain on weak manufacturing data

* Weak capital goods data boosts demand for bonds

* Thirty-year bond yields lowest since November

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

* Treasury to sell $26 bln two-year notes

NEW YORK, June 26 (Reuters) - U.S. Treasury prices gained on Monday after data showed that new orders for U.S. capital goods fell unexpected in May, suggesting a loss of momentum in the manufacturing sector halfway through the second quarter. The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2 percent. The data is pretty bad, said Thomas Simons, a senior money market economist at Jefferies in New York.

Benchmark 10-year notes were last up 2/32 in

price to yield 2.137 percent, down from 2.144 percent late on

Friday. Thirty-year bond yields fell to 2.70

percent, the lowest since Nov. 9. The yield curve between five-year notes and 30-year bonds fell to 94.60 basis points, the flattest since late 2007. The yield curve has flattened in the past month as Federal Reserve speakers including New York Fed President William Dudley have indicated further monetary policy tightening is likely, weighing on short- and intermediate-dated debt. Long bonds, by contrast, have been supported by concerns about tepid growth and falling inflation. Inflation is the key, said Simons. 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. The Treasury will sell $26 billion in two-year notes on Monday, the first auction of $88 billion in new coupon-bearing debt supply this week. 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)

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