TREASURIES-Prices fall before 10-yr auction, stock volatility could help demand


* Treasury to sell $24 bln 10-year notes

* Equity volatility may boost demand for bonds

NEW YORK, Feb 7 (Reuters) - U.S. Treasury prices fell on Wednesday before the Treasury Department was due to auction new 10-year notes, though losses were limited as investors remained nervous about recent equity market volatility. Mondays stock market rout helped bring investors back to low risk bonds, after yields hit four-year highs on concerns that rising inflation might lead the Federal Reserve to raise rates faster than previously anticipated. That bid may help the Treasury sell $24 billion in 10-year notes, the second sale of $66 billion in coupon-bearing supply this week. I think there will be some increased demand in the 10-year from investors because they are very unsure of the future of the equity market, said Tom di Galoma, a managing director at Seaport Global Holdings in New York. The government will also sell $16 billion in 30-year bonds on Thursday. The United States saw soft demand for a $26 billion sale of three-year notes on Tuesday. U.S. stocks were weaker on Wednesday after a wild session on Tuesday saw the Dow Jones Industrial Average swing more than 1,100 points from peak to trough.

Benchmark 10-year yields were last down 6/32 to

2.789 percent, up from 2.766 percent on Tuesday. The yields rose as high as 2.885 percent in overnight trading on Monday, the highest since January 2014. Investors remain nervous about the prospect of higher yields as data continues to point to a stronger economy. Next weeks consumer price and retail sales data will be closely scrutinized for further indications of rising price pressures. My belief is that fixed income investors are better sellers of Treasuries and of rates in general, mainly because they still believe the economy is doing quite well, said di Galoma. Dallas Fed President Robert Kaplan said on Wednesday that higher wages would not necessarily lead to faster inflation.

Another concern is that the Treasury faces larger funding needs due to the U.S. central banks declining participation in the bond market. Large increases in issuance this year are expected after the government raises the debt ceiling. 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.

(Reporting by Karen Brettell; Editing by Andrew Hay)