TREASURIES OUTLOOK-U.S. bond prices gain as softer stocks revive bids

* Benchmark U.S (Other OTC: UBGXF - news) . bond yields scale back from 2-week peak

* Traders see miniscule chance of Fed rate hike Wednesday

* U.S. to sell 5-year, 7-year fixed-rate notes (Repeats to additional subscribers)

By Richard Leong

NEW YORK, Oct (HKSE: 3366-OL.HK - news) 26 (Reuters) - U.S. Treasuries prices rose on Monday, with benchmark yields retreating from two-week highs as stock market losses and disappointing data on domestic new home sales rekindled demand for low-risk government bonds.

Bonds' gains were limited by typical investor caution ahead of a two-day Federal Reserve policy meeting and sales of existing holdings to make room for supplies of five-year and seven-year notes later this week.

"It (Other OTC: ITGL - news) 's taking back a bit of last week's yield increase," said Anthony Valeri, fixed income strategist at LPL Financial (NasdaqGS: LPLA - news) in San Diego. "Softer equities prices led the way."

Benchmark 10-year Treasury notes were up 7/32 in price for a yield of 2.058 percent, down 2.5 basis points from late on Friday.

The yield reached a two-week high of 2.099 percent on Friday, when global equities markets rallied after China cut interest rates for the sixth time in less than a year to stem further slowing in economic growth.

Worries about the world's second-biggest economy and sharp market swings this summer on bets on whether the Fed would raise interest rates for the first time since 2006 have caused central bank policymakers to hesitate.

The Federal Open Market Committee, the Fed's policy-setting group, will meet on Tuesday and Wednesday.

U.S. interest rates futures implied traders saw a 7 percent probability the U.S. central bank will raise rates on Wednesday and a 36 percent chance of an increase in December, according the CME Group (Kuala Lumpur: 7018.KL - news) 's FedWatch program.

"The market is appropriately priced for a Fed that's likely on hold this year," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

The stunningly steep 11.5 percent drop in U.S. new home sales in September reported on Monday reinforced the view the economic expansion might be too vulnerable for the Fed to move away from a near-zero rate policy.

Economic worries exerted selling pressure on the stock market. The three major Wall Street indexes came off their initial lows, with the Nasdaq (NasdaqGS: NDAQ - news) composite pushing into positive territory in midday trading.

On the supply front, the Treasury Department will sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year debt on Thursday. It will also auction $15 billion in two-year floating-rate securities on Wednesday.

The Treasury postponed its monthly sale of two-year fixed-rate notes because it might not be able to borrow money when that auction would have settled on Nov. 2.

(Reporting by Richard Leong; Editing by Lisa Von Ahn, Alan Crosby and Paul Simao)