UPDATE 4-Weak demand mars third straight U.S. bond auction

(Recasts; adds auction stats)

By Chris Reese

NEW YORK, June 29 (Reuters) - A poor U.S. Treasury auction on Wednesday rounded out one of the worst weeks for U.S. debt sales in a year as receding fears that Greece was on the verge of bankruptcy undermined the safe-haven value of Treasuries.

Though much work remains, Greece's parliament approved severe budget cuts aimed at averting a default that could damage the global financial system. With renewed optimism, investors chased stock prices higher and gave the Treasury auction the cold shoulder.

The $29 billion auction of seven-year notes drew the weakest demand in more than a year, as did a debt auction on Tuesday, suggesting investors found bonds unattractive after a steep rally dating back to April.

If the Treasury's losing streak continues much longer, investors may begin to wonder if concerns over the precarious U.S. budget situation are seeping into the market. For now, however, analysts said Greece and other factors were to blame.

"This is three bad auctions in a row. People think that some of the risks in Greece are mitigated at this point," said James Caron, global head of interest rate strategy at Morgan Stanley in New York.

"Now that the Greece risk has subsided a bit, there is a lot of unwinding of these (safe-haven) hedges," he said, adding "this is going to raise concerns about future auctions."

AGGRESSIVELY UNDERCUT

The United States could find itself in a Greek-style bind if it doesn't get its own fiscal affairs in order.

Since deficit-reduction talks collapsed last week, Republicans and Democrats have made no progress on a deal to permit Congress to extend the government's borrowing authority.

Treasury Secretary Timothy Geithner said he would not be able to stave off default if Congress does not reach a deal to raise the $14.3 trillion debt ceiling by Aug. 2.

However, dealers said that, aside from Greece, issues like quarter-end position-squaring played a key role in Wednesday's auction troubles.

Investors bid for 2.62 times the amount on offer, the weakest showing since March 2010.

Yields that are only marginally above six-month lows, also contributed to bidders snubbing the three auctions this week, analysts said.

The high yield in the sale of $29 billion of seven-year notes on Wednesday US7YT=RR came in at 2.43 percent, above where the notes were trading in the when-issued market, showing investors were aggressive in efforts to undercut prices.

Indirect bidders, including foreign central banks, bought 32 percent of the notes at auction, which was the second-lowest level since the seven-year notes were reintroduced in February, 2009. For auction details click on [ID:nTAR000342].

Though bond yields have been rising this week the market is set for the biggest quarterly rise since the second quarter of 2010, according to the Barclays Capital Treasury index. Benchmark 10-year note yields US10YT=RR on Wednesday were trading only 27 basis points above the six-month low of 2.84 percent touched on Monday.

"You had the Greek situation which took a bit of the flight to quality out of the market and as you approach quarter-end a lot of people have what they want on their books, so the bids were very defensive," said Tom Tucci, head Treasury trader at RBC Capital Markets in New York.

"The Greek situation provides a temporary respite but it's not a solution. But we came from levels that were too rich as far as bond investors were concerned, now we're trying to settle back into a level that will generate interest," Tucci said.

The sale of $35 billion of two-year notes US2YT=RR on Monday and $35 billion of five-year notes US5YT=RR on Tuesday also met with tepid demand.

The next round of Treasury auctions is set for July 12, 13 and 14, with the sale of three-year and 10-year notes and 30-year bonds, respectively.

"People are going to walk away disappointed at light indirect interest this week -- people will draw conclusions about that but it's hard in the fog of quarter-end with yields at absolutely and relatively low levels," said Chris Ahrens, interest rate strategist at UBS in Stamford, Connecticut. (Additional reporting by Emily Flitter, Richard Leong and Karen Brettell; Editing by Burton Frierson and James Dalgleish)