Wires

TREASURIES-Yields lower before 7-year note auction

Karen Brettell

NEW YORK, Dec 26 (Reuters) - U.S. Treasury yields edged lower on Thursday before the Treasury Department is due to sell $43 billion in seven-year notes, with volumes light as many traders and investors were away after Wednesdays Christmas Day holiday. The auction comes after the U.S. government saw strong demand for a $41 billion sale of five-year notes on Tuesday and slightly soft interest in a $40 billion two-year note sale on Monday. The auction is the last major event this week with no major economic releases scheduled. Investors are also focused on whether there will be strains in the overnight funding markets, with banks expected to pare risk taking for year-end. The New York Federal Reserve has been injecting liquidity into the repurchase agreement (repo) market in order to reduce the chance of funding strains, after a flareup in September sent the cost of overnight loans as high as 10%, more than four times the Feds rate at the time. The Fed's repo operations, however, are made only with major dealers, with the banks in turn passing liquidity on to their clients. This could lead some clients struggling to raise funds over the year-end period if banks cut back lending.

December 26 Thursday 9:04AM New York / 1404 GMT

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(Editing by Chizu Nomiyama)