TREASURIES-Yields fall to one-month low as weak housing sparks growth concerns

(Adds quotes, two-year auction result; updates prices) By Karen Brettell NEW YORK, May 24 (Reuters) - U.S. Treasury yields fell to one-month lows on Tuesday after housing data pointed to a cooling economy as the Federal Reserve presses on with aggressively hiking interest rates to tackle soaring inflation. Sales of new U.S. single-family homes tumbled to a two-year low in April, likely as higher mortgage rates and record prices squeezed first-time buyers and those in search of entry-level properties out of the housing market. "This is bad news for home prices and economic activity," James Knightley, chief international economist at ING, said in a note. "Weakening demand and rising supply imply the possibility that house prices will soon top out and start to fall. Rising interest rates in an environment of falling home prices are never a good combination for consumer sentiment and will add to the chances of a retrenchment and potential recession down the line," he said. Longer-dated yields have dropped from 3-1/2-year highs as sharp declines in stocks increased demand for U.S. government debt, and as investors worry that the Fed's continued rate hikes will tip the economy into a recession. "There has been some domestic interest in this rate rise, where accounts have come to this decision that a recession is probably a lot closer than the market thinks," said Tom di Galoma, managing director at Seaport Global Holdings in New York. Other data showed U.S. business activity slowed moderately in May as higher prices reduced demand for services. Two-year note yields fell to 2.464%, the lowest since April 19, before rising back to 2.483%. Benchmark 10-year note yields dropped to 2.718%, the lowest since April 27, before rebounding to 2.760%. Minutes from the Fed's May meeting released on Wednesday are likely to show the U.S. central bank remains committed to tightening policy at a rapid pace. Fed funds futures traders are pricing in 50 basis point rate increases for each of the Fed's June and July meetings, and a strong possibility of the same in September. The Fed's benchmark rate is expected to rise to 2.90% by March, from 0.83% now. However, some investors also think the Fed could pivot to a less aggressive stance if the economy weakens significantly. Atlanta Fed President Raphael Bostic said on Monday it "might make sense" to pause further hikes after the June and July meetings for the U.S. central bank to assess the impact on inflation and the economy. Inflation expectations also dipped, with breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) , a measure of expected average annual inflation for the next five years, at 2.90% on Tuesday. They have fallen from a peak of 3.62% last month. The Treasury Department saw strong demand for a $47 billion sale of two-year notes on Tuesday, the first sale of $137 billion in new coupon-bearing debt this week. The notes sold at a high yield of 2.519%, around a basis point below where they had traded before the sale. The bid-to-cover ratio was strong at 2.61 times. The U.S. government will also sell $48 billion in five-year notes on Wednesday and $42 billion in seven-year notes on Thursday. May 24 Tuesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 1.0475 1.0649 -0.013 Six-month bills 1.47 1.5016 -0.064 Two-year note 100-8/256 2.4828 -0.142 Three-year note 100-64/256 2.6618 -0.129 Five-year note 99-248/256 2.7566 -0.119 Seven-year note 100-138/256 2.7887 -0.108 10-year note 101 2.7596 -0.099 20-year bond 101-84/256 3.1597 -0.099 30-year bond 98-24/256 2.9715 -0.095 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.75 2.25 spread U.S. 3-year dollar swap 13.50 0.50 spread U.S. 5-year dollar swap 2.25 0.50 spread U.S. 10-year dollar swap 5.25 0.25 spread U.S. 30-year dollar swap -26.00 1.50 spread (Reporting by Karen Brettell; Editing by Emelia Sithole-Matarise, Nick Zieminski and Richard Chang)