TREASURIES-U.S. bond prices rise on German debt, inflation data

* Mixed U.S (Other OTC: UBGXF - news) . data support view on gradual rate increases

* U.S. bonds' appeal grows as German yields at record lows

* U.S. seen selling 7-year notes at highest yield since July

* U.S. bond market to close Thursday for Thanksgiving (Adds late market action)

By Richard Leong

NEW YORK, Nov 25 (Reuters) - U.S. Treasury debt prices were steady to higher on Wednesday on record low yields for German government bonds and data that supported the view of muted domestic inflation ahead of the U.S. Thanksgiving Day holiday.

The yield curve flattened to levels not seen in over nine months as investors preferred longer-dated Treasuries over shorter-dated issues in anticipation the Federal Reserve would raise short-term interest rates at its Dec. 15-16 policy meeting and data that showed core inflation on a year-over-year basis in October was stuck at 1.3 percent, still below the Fed's 2 percent goal.

"The economic numbers have been decent. The yield flattening will likely continue into next year," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri.

The yield gap between U.S. two-year and 10-year Treasuries narrowed to 1.30 percentage points, the narrowest since early February, according to Reuters data.

Solid (KOSDAQ: 050890.KQ - news) demand at a $29 billion seven-year debt auction also helped boost bond prices.

Trading volume was lighter than usual in advance of the Thanksgiving holiday. The U.S. bond market will be shut on Thursday and close early at 2 p.m. EST (1900 GMT) on Friday.

U.S. bond prices reached session highs earlier as shorter German Bund yields fell to record negative levels following a Reuters report that said the European Central Bank will consider tools to stimulate the euro zone economy at its Dec. 3 meeting.

As the ECB mulls cutting interest rates, Fed policymakers have said a rate increase is possible next month.

"We have a Fed that's going the other way. It (Other OTC: ITGL - news) makes us look cheap," David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut, said about Treasuries in comparison to their European counterparts.

Thursday's stronger-than-forecast data on durables goods and jobless claims supported the notion the U.S. economy could handle a rate increase in December, but weaker-than-expected readings on consumer inflation and sentiment gave weight to the idea of a gradual path for rate increases.

In late afternoon trading, benchmark 10-year Treasuries notes were up 3/32 in price, yielding 2.232 percent, down 1 basis point from late on Tuesday.

The two-year yield was up marginally at 0.934 percent, which was within striking distance of the 5-1/2-year peak seen on Nov. 6.

The 30-year bond was the strongest performing maturity, rising 7/32 in price for a yield of 2.995 percent, down 1 basis point. (Reporting by Richard Leong; Editing by Paul Simao and Jonathan Oatis)