* Two-year yield climbs to highest in two months
* U.S. new homes sales jump to highest in over eight years
* U.S. 2-10 year yield curve flattest since late 2007
* Futures imply traders see growing chances on June rate hike
By Richard Leong
NEW YORK, May 24 (Reuters) - U.S. Treasury prices fell on Tuesday, with the two-year yield at its highest in two months, as a rally on Wall Street stocks and robust new home sales data reduced the appeal of low-yielding government debt.
Growing bets that the Federal Reserve may raise interest rates as early as June also underpinned the sell-off in the bond market ahead of a $26 billion auction of two-year Treasury notes at 1 p.m. (1700 GMT).
Since last week, top U.S. central bank officials have signaled the possibility of a rate increase in coming months if the economy rebounds from an anemic first quarter.
"The Fed is looking to raise rates," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. "There is a strong possibility of a June hike."
Late Monday, Philadelphia Fed President Patrick Harker said a rate increase at its June 14-15 meeting would be appropriate if the economic expansion persists.
The housing sector is supporting the view of moderate growth. Domestic new home sales jumped to their strongest monthly pace in more than eight years in April, with prices setting record highs.
U.S. interest rate futures implied traders saw a 36 percent chance of a June increase, up from 30 percent on Monday, CME Group's FedWatch showed.
Hopes that higher interest rates would help banks' profits and a resilient housing market would boost home builders' bottom lines lifted U.S. share prices and pared bids for Treasuries.
Benchmark 10-year Treasury prices were down 9/32 in price for a yield of 1.873 percent, up more than 3 basis points from Monday.
The two-year Treasury yield rose 2 basis points to 0.922 percent, reaching its highest level in two months.
The spread between two-year and 10-year Treasuries shrank to 93 basis points, the tightest since December 2007, Reuters data showed.
Analysts expected the spike in yields since last week would entice bids at this week's auctions of two-year, five-year and seven-year debt, which are worth a combined $88 billion.
In "when-issued" activity, traders expected the two-year supply to sell at a yield of 0.941 percent, which would be the highest since December, according to Tradeweb. (Reporting by Richard Leong; Editing by Lisa Von Ahn)