* Two-year note auction draws strong demand
* Treasury to sell $36 bln five-year notes on Wednesday
By Karen Brettell
NEW YORK, July 24 (Reuters) - The highest short-term yields in a decade helped the government sell $35 billion in two-year notes on Tuesday, bringing the yield curve down from its steepest levels in three weeks.
The auction drew the strongest demand since January for the notes, which sold at a yield of 2.657 percent, the highest since 2008.
Bonds have weakened since Friday, led by longer-dated Treasuries, on concerns that central banks globally will be less accommodative.
Yields “backed up over the last couple of days so they were probably perceived as of value to people that were thinking of jumping in last week. They got better bang for their buck today,” said Lou Brien, a market strategist at DRW Trading in Chicago.
The U.S. government will also sell $36 billion in five-year notes on Wednesday and $30 billion in seven-year notes on Thursday.
The yield curve between two-year and 10-year notes flattened to 31 basis points after the auction, from 33 basis points earlier in the day, but above the 23 basis point area reached last week, which was the flattest level in a decade.
Yields have risen and the yield curve has steepened since Reuters reported on Friday that the Japanese central bank was discussing modifying its easing program, raising concerns about demand for government debt.
“That triggered the first wave of bear steepening,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.
Bear steepening is when the long-term yields rise at a faster pace than shorter-term ones.
U.S. President Donald Trump’s comments criticizing Federal Reserve rate hikes have also added to the steepening.
Trump on Friday questioned the Fed’s expected pace of hikes in posts on Twitter, saying it takes away from the United States’ “big competitive edge.”
The U.S. yield curve has flattened as the Fed raises rates, pushing up yields on shorter-dated notes at a faster pace than longer-dated ones.
Some of the steepening since Friday, however, likely reflects an overdue pullback after 30 basis points of flattening since May.
“The pace of flattening seems to have gotten a little ahead of itself and in this cycle whenever that happens you tend to see a little bit of a snap back and curve steepens out, and then when it gets comfortably steep people come back and pile into the flattener trade,” Rajappa said. (Reporting by Karen Brettell; Editing by Steve Orlofsky)