(Adds auction results, quote; Updates prices)
* Prices volatile on concern about bond, stocks selloff
* Soft demand for $26 bln three-year note auction
* Mid-March T-bill yields rise on debt ceiling concern
NEW YORK, Feb 6 (Reuters) - U.S. Treasury debt prices gained on the day on Tuesday as volatile equity markets led some investors to seek out lower risk bonds, though many investors remained nervous after a week long bond rout sent yields on Monday to four-year highs. Bonds have been roiled in the past week on fears that the Federal Reserve will adopt a more aggressive rate hike policy as inflation data improves. The pace of market moves, however, has worried some traders and analysts who say pockets of illiquidity and algorithmic trading are also creating volatility. I do think that there is some element of inflation, but it couldnt be the only thing, said Thomas Simons, a money market economist at Jefferies in New York.
Benchmark 10-year yields surged to 2.885 percent
in overnight trading on Monday, the highest since January 2014, before falling as low as 2.707 percent as stock selloff hastened in the New York afternoon session. The notes were last up 11/32 in price on the day on Tuesday to yield 2.755 percent. They have risen from a low of 2.654 percent on Jan 29. Investors are also nervous about bond yields as the Treasury Department is due to significantly increase issuance this year to make up for declining Fed purchases. "If the equity market starts to calm a little bit here in the near-term I think people will start to focus a lot more on the supply issue," said Michael Schumacher, head of rate strategy at Wells Fargo in New York. The United States saw soft demand for a $26 billion sale of three-year notes on Tuesday, the first sale of $66 billion in coupon-bearing supply this week. The Treasury will also sell $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday. Large increases in issuance this year are expected after the government raises the debt ceiling. Yields on bills due in mid-March have increased above some maturities due at a later date as investors worry that Congress may delay raising the debt limit, which could risk a government default on its debt payments. The Congressional Budget Office said last Wednesday it thought the government would run out of cash to pay its bills in the first half of March. Yields on six-month Treasury bills due on March 8 are yielding 1.45 percent, 7 basis points higher
than similar debt due on March 15 .
(Editing by Chizu Nomiyama)