(Updated to mid-afternoon New York time)

By Karen Brettell

NEW YORK, Dec 23 (Reuters) - U.S. Treasury yields rose

on Monday and 10-year yields reached a nearly seven-month high

as the Treasury Department this week sells short- and

intermediate-dated debt, with volumes muted while many traders

are away before Wednesday's Christmas holiday.

A healthy demand met a $69 billion sale of two-year notes on

Monday, the first auction of $183 billion in coupon-bearing

supply this week.

The notes sold at a high yield of 4.335%, close to where

they were trading before the auction. Demand was 2.73 times the

amount of debt on offer.

Indirect bidders took 82.1% of the sale, which Lou Brien,

strategist at DRW Trading, said is a record high portion. "This

indicates strong foreign demand," Brien said in a note.

The Treasury will also sell $70 billion in five-year notes

on Tuesday and $44 billion in seven-year notes on Thursday.

The auctions are testing demand for U.S. government debt

following a selloff sparked in part by concerns that inflation

will remain stubbornly elevated above the Federal Reserve's 2%

annual target.

Fed policymakers last week lowered their rate cut

projections for 2025 to 50 basis points, from 100 basis points,

and increased their inflation forecast.

The U.S. central bank cut interest rates by 25 basis points

as expected, but Fed Chair Jerome Powell said more reductions in

borrowing costs now hinge on further progress in lowering price

pressures.

"The biggest surprise was the upward revision to inflation

next year. Fed officials project a 2.5% inflation rate by the

end of 2025, up from the 2.1% forecast in September and most

likely reflecting uncertainty from potential trade wars,"

Jeffrey Roach, chief economist, and Lawrence Gillum, chief fixed

income strategist, at LPL Financial said in a report on Monday.

President-elect Donald Trump has warned that he may

implement more tariffs on trading partners, which analysts say

could lead to higher inflation.

Money market traders are currently pricing in 35 basis

points of Fed rate cuts next year, indicating that they see a

less-than-50% chance the U.S. central bank will make a second 25

basis-point cut.

Data on Monday showed that new orders for key

U.S.-manufactured capital goods surged in November amid strong

demand for machinery, while new home sales rebounded after being

weighed down by hurricanes, offering more signs that the economy

is on solid footing as the year ends.

Benchmark 10-year note yields were last up 7.3

basis points at 4.597%, the highest since May 30.

Two-year note yields, which are highly sensitive

to Fed interest-rate policy, rose 3.5 basis points to 4.347%.

The yield curve between two- and 10-year notes

steepened by around 4 basis points to 24.9 basis

points. It reached 27.6 basis points on Thursday, the steepest

since June 2022.

The bond market will close early on Tuesday and be closed on

Wednesday for the Christmas holiday.