(Adds BOE, quotes, auction results; updates prices)
* Bonds weaken as BOE's Carney warns of rate hike
* Yield curve steepens from flattest since 2007
* Treasury sells $28 bln seven-year notes
NEW YORK, June 28 (Reuters) - Long-dated U.S. Treasury prices weakened on Wednesday as central banks in Europe were deemed to strike a more hawkish tone, even after reports that markets had misinterpreted comments by European Central Bank President Mario Draghi on Tuesday. Bonds weakened and the euro gained after Draghi indicated the ECB might tweak its stimulus so that it does not become more accommodative as the economy recovers. Reports on Wednesday said, however, 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. Bonds pared price losses after the ECB reports, before weakening again after Bank of England Governor Mark Carney said that a rise in British interest rates is likely to be needed as the economy comes closer to running at full capacity.
They are talking about tightening sooner or later so that definitely got the markets attention, said Dan Mulholland, head of Treasuries trading at Credit Agricole in New York.
Benchmark 10-year notes fell 7/32 in price to
yield 2.22 percent, up from 2.20 percent late on Tuesday. The yields rose as high as 2.256 before the ECB reports. Bond yields rose even as markets approached month-end rebalancing, which typically increases demand for Treasuries. The index extension is kind of small so I think thats one reason why the market hasnt been trading as well as it normally might do in the week of a month-end, said Mulholland. The yield curve between five-year notes and 30-year bonds steepened to 95.8 basis points 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. The Treasury Department on Wednesday sold $28 billion in seven-year notes to moderate demand, in the final sale in $88 billion of new coupon-bearing supply this week. The notes sold at a high yield of 2.056 percent, just above where the debt had traded before the auction.