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TREASURIES-Prices dip, moderate demand at seven-year auction

(Adds auction results, quotes; Updates prices)

* U.S. sells $28 bln seven-year notes

* Month-end extension buying ebbs

* Bond market to close early on Friday

NEW YORK, Dec 28 (Reuters) - U.S. Treasury prices dipped on Thursday, giving back some of Wednesdays strong month-end extension rally, after the Treasury Department sold $28 billion of seven-year notes to moderate demand. 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 2.436 percent on

Thursday with no major news or economic catalysts to drive market direction. The Treasury saw lukewarm demand for $28 billion in seven-year notes on Thursday, the final sale of $88 billion in coupon-bearing supply this week. The notes sold at a yield of 2.370 percent, the highest yield at a seven-year auction since December 2013. The ratio of bids to the amount of seven-year Treasuries offered was 2.55, the strongest reading since September. 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. The yield curve between two-year and 10-year notes edged higher to 53 basis points, after falling to 50 basis points on Wednesday, the flattest level since Oct. 2007. Many investors expect the yield curve to flatten further next year as short-and intermediate-dated debt underperforms on expectations of further rate increases, and as the Treasury increases supply to make up for the Federal Reserves declining bond purchases. It still has room to flatten given the Fed expectations, given growth in the economy, and given where the issuance is going to come from the Treasury, said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. The Fed has indicated that an additional three increases are likely next year, though interest rate futures traders are pricing in only two. The Treasury is expected to initially concentrate supply increases in Treasury bills and shorter-dated notes. Trading volumes have been thin this week with many traders and investors away after Monday's Christmas holiday and before next Monday's New Year's Day holiday. The bond market will close early on Friday at 2 p.m EST (1900 GMT).

(Editing by Susan Thomas Editing by Chizu Nomiyama)

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