TREASURIES-Prices dip before seven-year auction

* U.S. to sell $28 bln seven-year notes

* Month-end extension buying ebbs

NEW YORK, Dec 28 (Reuters) - U.S. Treasury prices dipped on Thursday, giving back some of Wednesdays strong month-end extension rally, as investors prepared for the Treasury Departments $28 billion sale of seven-year notes. Benchmark 10-year note yields fell as low as 2.407 percent on Wednesday, from 2.479 percent, as investors sought to extend the duration of their bond portfolios before year-end. A lot of this month-end buying is getting done before the actual month-end, said Tom di Galoma, a managing director at Seaport Global Holdings in New York. There is so much duration that needs to be bought at month-end and markets are very thin.

The 10-year yields rose back to 2.427 percent on

Thursday with no major news or economic catalysts to drive market direction. The Treasury will auction $28 billion in seven-year notes on Thursday, the final sale of $88 billion in coupon-bearing supply this week. The United States saw below average demand for a $26 billion sale of two-year notes on Tuesday and a $34 billion sale of five-year notes on Wednesday. Short- and intermediate-dated debt is highly sensitive to interest rate hikes and the notes have also been under pressure since October on expectations that the Treasury will increase supply next year as the Federal Reserve reduces its bond purchases. The Treasury is expected to initially concentrate supply increases in Treasury bills and shorter-dated notes. 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 Susan Thomas)