TREASURIES-Yield curve resumes flattening as rate hikes seen near

(Updates prices)

* Prices erase earlier losses, yield curve resumes

flattening

* Seven-year note auction sees lowest demand in 13 months

* Bond market closes early Wednesday, closed Thursday

By Karen Brettell

NEW YORK, Dec (Shanghai: 600875.SS - news) 24 (Reuters) - Long-dated U.S. Treasury prices

ended higher on Wednesday and the yield curve resumed flattening

as investors bet that the Federal Reserve is closer to raising

interest rates.

The Treasury yield curve is its flattest in six years and

two-year note yields are the highest in three-and-a-half years

as traders prepare for an imminent rate hike.

Money markets are also adjusting. Overnight index swaps

indicate the federal funds rate will more than double to 30

basis points in a year.

"People are gaining confidence that the economy is on very

solid ground, and the Fed is probably going to move earlier than

June, and that all rates should rise," said Charles Comiskey,

head of Treasuries trading at Bank of Nova Scotia in New York.

Bonds posted their worst day in nine months on Tuesday after

data showed the economy grew in the third quarter at its

quickest pace in 11 years. The number of

Americans filing new claims for unemployment benefits also

unexpectedly fell last week.

Short and intermediate-dated debt has been most hurt in

recent months by expectations of an interest rate hike, while

30-year bonds have been in strong demand as investors reach for

higher yields, and on concerns about deflation.

Thirty-year bonds and 10-year notes took the brunt of this

week's selloff, before recovering on Wednesday afternoon.

"Selling pressure is moving out the curve," Comiskey said.

"People are coming to grips that interest rates are going to

rise and the front-end can only go so far before an actual rate

hike."

Thin trading conditions heading into Thursday's Christmas

holiday have dented demand and exacerbated price moves this

week. Some investors also unwound flattening trades that have

been profitable this year, said traders.

The gap (NYSE: GPS - news) between five-year and 30-year Treasury yields

flattened to 106 basis points, and is down from

around 220 basis points at the beginning of the year.

The government sold $29 billion in new seven-year notes on

Wednesday to tepid demand.

The notes sold at a high yield of 2.125 percent, the highest

since September. The bid to cover ratio was the lowest since

November 2013 as direct bidders bought the lowest share of the

bonds since February 2011.

The bond market closed Wednesday at 2 p.m. (1900 GMT) and

will be closed all day on Thursday.

(Additional reporting by Richard Leong; Editing by W Simon and

Grant McCool)