* Bonds pare price gains on Draghi walk back
* Yield curve steepens from flattest since 2007
* Treasury to sell $28 bln seven-year notes
NEW YORK, June 28 (Reuters) - U.S. Treasury prices weakened on Wednesday, but came off their lows on reports that markets had misinterpreted comments by European Central Bank President Mario Draghi on Tuesday as being more hawkish than he had intended. Bonds weakened and the euro gained on Tuesday after Draghi indicated that the ECB might tweak its stimulus so that it does not become more accommodative as the economy recovers.
Reports on Wednesday, however, said that Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, according to sources familiar with his thinking. The big trigger of action this morning has been the walk back of Draghis more hawkish comments yesterday, said Guy Le Bas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
Benchmark 10-year notes were last down 4/32 in
price to yield 2.212 percent, up from 2.20 percent late on Wednesday. The yields rose as high as 2.256 before the ECB reports. The yield curve between five-year notes and 30-year bonds steepened after falling to 91.9 basis points overnight, the lowest since late 2007. The yield curve has flattened in the past month as Federal Reserve officials indicated that further monetary policy tightening was likely even as inflation falls below targets. That has caused short- and intermediate-dated debt, which is more sensitive to interest rate changes, to underperform while concerns about tepid growth and falling inflation have supported long bonds. Fed Chair Janet Yellen on Tuesday reiterated her view that the U.S. central bank would continue to raise rates only gradually. The Treasury Department on Wednesday will sell $28 billion in seven-year notes, the final sale in $88 billion of new coupon-bearing supply this week. A $34 billion sale of five-year notes saw the weakest demand in four months on Tuesday. The ratio of bids to the amount of
five-year notes offered came in at 2.33, the lowest
since February. That came after the government sold $26 billion in two-year notes to strong demand on Monday.
(Editing by Meredith Mazzilli)