TREASURIES-Yields jump as risk sentiment improves before Fed statement

(Updates with long-dated yields rising most since March, closing stock market gains)

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

* Fed meeting statement on Wednesday in focus

* Three-month T-bill yields rise on debt ceiling fears

NEW YORK, July 25 (Reuters) - Long-dated U.S. Treasury yields jumped by the most in almost five months on Tuesday as stocks hit record highs and demand for safe-haven bonds fell, a day before the Federal Reserve was due to release a statement after its two-day policy meeting. The S&P 500 and Nasdaq both closed at record highs, helped including McDonald's and Caterpillar. Investors are also awaiting the Fed's statement for new indications about when the U.S. central bank will begin paring its bond holdings and next raise interest rates. Yields on 30- and 10-, and seven-year Treasury securities, which move in the opposite direction to their prices, rose by about eight basis points each, the largest rise for all three since March 1. Yields on shorter-dated paper rose by a lesser margin, prompting a steepening of the yield curve. "It's mainly the 'risk on' trade that is propelling bond (prices) lower," said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle. Also, "there is some nervousness ahead of the Fed." Many analysts and investors expect the Fed to announce that it will begin reducing its bond portfolio at its September meeting, but will be watching for any hints on the timing at this week's meeting. Further interest rate hikes are not seen as likely until at least December. Futures traders are pricing in a 53 percent chance that the Fed will raise rates at its December meeting, according to the CME Group's FedWatch Tool.

Benchmark 10-year notes dropped 22/32 in price

to yield 2.33 percent, up from 2.25 percent on Monday. The Treasury Department sold $26 billion in two-year notes on Tuesday to strong demand, the first sale of $88 billion in coupon-bearing supply this week. Overall bidding was the strongest since late 2015, while the notes paid the highest yield for this debt maturity at an auction since October 2008. The United States will also sell $34 billion in five-year notes on Wednesday and $28 billion in seven-year notes on Thursday.

Yields on three-month Treasury bills were

elevated on concerns that payments on debt due in October will be delayed if Congress fails to raise the debt ceiling before the Treasury runs out of funds. The Congressional Budget Office said last month that Congress would need to increase the debt limit by early to mid-October to avoid a default.

Yields on Treasury bills that mature on Oct. 26

last traded at 1.17 percent after earlier rising to 1.20 percent, the highest level since October 2008.

(Reporting by Karen Brettell; Additional reporting by Dan Burns; Editing by Richard Chang and Tom Brown)