* Two-year yield hit two-month highs before retreating
* Brisk two-year note sale lifts bond prices from earlier lows
* U.S. new homes sales jump to highest in over eight years
* Futures imply traders see growing chances on June rate hike (Updates market action, adds quotes)
By Richard Leong
NEW YORK, May 24 (Reuters) - U.S. Treasury prices fell on Tuesday, with the two-year yield touching two-month highs, but prices bounced off session lows when robust demand at the $26 billion note auction offset pressure from a stock market rally and strong U.S. home sales data.
The Treasury market has been under pressure as investors bet the Federal Reserve may raise interest rates as early as June. Minutes on the April Fed policy meeting, released last week, hinted the U.S. central bank may raise interest rates soon 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 in April jumped to their strongest monthly pace in more than eight years, with prices setting record highs.
U.S. interest rate futures implied traders saw a 36 percent chance of a June increase before easing to 34 percent in late trading. On Monday, they implied traders placed a 30 percent chance on a rate hike, CME Group’s FedWatch showed.
Hopes that higher interest rates would boost bank profits and that a resilient housing market would fatten home builders’ bottom lines lifted U.S. share prices and pared bids for Treasuries.
Benchmark 10-year Treasury prices were down 5/32 in price for a yield of 1.859 percent, up 2 basis points from Monday.
The two-year Treasury yield was up as much as 3 basis points to a two-month high at 0.930 percent before easing to 0.909 percent, up 1 basis point on the day.
The Standard & Poor’s 500 index was up 1.4 percent in late trading.
In early trading, the spread between two-year and 10-year Treasuries shrank to 93 basis points, the tightest since December 2007, Reuters data showed.
The two-year note sale fetched the strongest overall demand since November, clearing at a yield of 0.920 percent . The strong auction results kindled afternoon buying of Treasuries, analysts said.
“The (two-year) auction turned around the market on a dime,” said David Keeble, global head of interest rate strategy at Credit Agricole Corporate & Investment Bank in New York. (Reporting by Richard Leong; Editing by Lisa Von Ahn and David Gregorio)