(Adds T-bill reaction to debt ceiling deal, updates prices)
* Soft demand for $24 bln 10-year note auction
* U.S. budget deal boosts growth expectations
* Treasury to sell $16 bln 30-yr bonds on Thursday
By Karen Brettell
NEW YORK, Feb 7 (Reuters) - U.S. Treasury prices dropped on Wednesday after the Treasury Department sold new 10-year notes to soft demand and the U.S. Senate reached a budget deal, boosting expectations of stronger economic growth.
The U.S. government had to pay higher rates to auction $24 billion in 10-year notes, the second sale of $66 billion in coupon-bearing supply this week.
The high yield on the sale was around 1 basis point above where it had before the auction. "Overall, the auction was a little weak," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.
The government will sell $16 billion in 30-year bonds on Thursday. The United States earlier saw tepid demand for a $26 billion sale of three-year notes on Tuesday. Bonds also came under pressure after lawmakers agreed on a two-year bipartisan budget deal worth around $300 billion that would lift caps on government spending. The White House said that the deal would increase the debt ceiling through March 2019. The differential on yields on some Treasury bills due in mid-March compressed on relief of the deal. Some Treasury bills had demanded a higher premium on concerns payments would be delayed.
Benchmark 10-year notes were last down 21/32 in price to yield 2.845 percent, up from 2.766 percent on Tuesday.
The yields had reached as high as 2.885 percent in overnight trading on Monday, the highest since January 2014, after stronger inflation data led investors to fear that the Federal Reserve may raise rates more times than previously expected.
Investors "still believe the economy is doing quite well," said Tom di Galoma, a managing director at Seaport Global Holdings in New York. "I think the trend is weaker in Treasuries."
Next week's consumer price and retail sales data will be scrutinized for further inflation indications.
Dallas Fed President Robert Kaplan said on Wednesday that higher wages would not necessarily lead to faster inflation. Chicago Fed President Charles Evans said that sluggish price increases give the Fed room to hold off on interest rate increases until at least mid-2018. Another concern for bond investors is that the Treasury faces larger funding needs due to the U.S. central bank's declining participation in the bond market.
"There are reasons for us to go higher in yield with the Fed in play and with more supply," said Lederer.
Large increases in issuance this year are expected after the government raises the debt ceiling.
(Editing by Cynthia Osterman and Nick Zieminski)
Change vsCurrent
Nykyield Three-month bills 1.52(+0.02) 1.547 Six-month bills 1.6875(+0.04) 1.726 Two-year note 99-24/32 (-03/32) 2.134 Five-year note 99-04/32 (-08/32) 2.563 10-year note 94-31/32 (-21/32) 2.845 30-year bond 92-27/32 (-1-15/32) 3.122
DOLLAR SWAP SPREADS
LASTChange U.S. 2-year dollar swap spread21.75 (-2.00) U.S. 3-year dollar swap spread16.50 (-3.50) U.S. 5-year dollar swap spread 8.50 (-0.75) U.S. 10-year dollar swap spread0.75 (-1.75) U.S. 30-year dollar swap spread-16.50 (-1.25)))Keywords: USA BONDS/
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