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TREASURIES-Yields rise before seven-year auction

* Treasury to sell $28 bln seven-year notes

* Corporate supply weighing on market

* Fed seen closer to paring balance sheet

NEW YORK, July 27 (Reuters) - U.S. Treasury yields rose on Thursday as investors prepared for new debt issuance and evaluated the Federal Reserves statement that it is closer to paring its balance sheet. The U.S. central bank said on Wednesday it expected to start winding down its massive holdings of bonds "relatively soon," despite striking a cautious tone on low inflation. Many analysts and traders expect the Fed to announce its balance sheet reduction plans at its September meeting. The Fed is still in play, said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York. At the same time, "we have the seven-year note auction ... and theres corporate supply coming to the market, so I think that will weigh on the market a little bit. The Treasury Department will sell $28 billion in seven-year notes on Thursday, the final sale of $88 billion in coupon-bearing supply this week. The United States sold $34 billion in five-year notes on Wednesday and $26 billion of two-year notes to strong demand.

Benchmark 10-year notes were last down 11/32 in

price to yield 2.32 percent, up from 2.28 percent on Wednesday.

Yields on three-month Treasury bills that are due

in October declined, after hitting almost 10-year highs earlier this week on concerns that payments on debt due in the month will be delayed if Congress fails to raise the debt ceiling. 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 1.09 percent, after rising to 1.20 percent on Tuesday, the highest level since October 2008. Data showed that new orders for key U.S.-made capital goods unexpectedly fell in June, but a fifth straight monthly increase in shipments suggested that business spending on equipment supported economic growth in the second quarter. The number of Americans filing for unemployment benefits rebounded from a three-month low last week, but remained below a level consistent with a tightening labor market. The next major economic data release will be Fridays gross domestic product estimate for the second quarter.

(Editing by Meredith Mazzilli)

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