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TREASURIES-Two-year U.S. Treasury yields highest since 2008

(Adds auction results, quotes; Updates prices)

* Treasury to sell $88 billion coupon-supply this week

* U.S. expected to increase auction sizes in 2018

* Trading conditions thin after Christmas holiday

NEW YORK, Dec 26 (Reuters) - Two-year U.S. Treasury yields rose to their highest levels in nine years on Tuesday as investors focused on new supply being sold into light trading conditions this week, and on large increases in issuance expected in 2018. The United States sold $26 billion in two-year notes on Tuesday, the first sale of $88 billion in new short- and intermediate-dated coupon-bearing supply this week. The auction attracted below average demand from investors, as expected with many traders and investors away after Monday's Christmas holiday. The ratio of bids to the amount of two-year

Treasuries offered was 2.52, the lowest reading in

a year. It was mediocre. It didnt surprise, said Lou Brien, a market strategist at DRW Trading in Chicago. The Treasury Department will sell $34 billion in five-year notes on Wednesday and $28 billion in seven-year notes on Thursday. It will further auction $13 billion in two-year floating-rate notes on Wednesday. Investors are also preparing for the U.S. government to increase auction sizes next year for the first time since 2008 to make up for declining purchases by the Federal Reserve. "The short-end has been too low for most of this month in terms of yield," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. "We think that's going to take another move up once January gets here and people start concentrating on additional Treasury supply." The Treasury is expected to initially concentrate increases in supply in Treasury bills and short- and intermediate-dated notes.

Two-year Treasury yields were last 1.908 percent,

up from 1.895 percent on Friday. The yields rose as high as 1.916 percent in overnight trading, the highest since Oct. 14, 2008.

Five-year note yields rose as high as 2.263

percent, the highest since April 12, 2011. Illiquid trading conditions were seen as exacerbating the moves. You have to attribute the movements partly to the time of year, said DRW's Brien. Short- and intermediate-dated debt is also highly sensitive to interest rate hikes, which can send their yields higher. The Fed has indicated that an additional three increases are likely next year, though interest rate futures traders are pricing in only two.

(Editing by Will Dunham and Chizu Nomiyama)

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