* Treasury to sell $33 bln two-year notes
* Italian bond rally reduces U.S. safety bid
* Fed meeting minutes on Wednesday in focus
By Karen Brettell
NEW YORK, May 22 (Reuters) - U.S. Treasuries were steady on Tuesday before the Treasury Department is due to sell $33 billion in two-year notes, the first sale of $99 billion in coupon-bearing supply this week.
Two-year note yields, which are the most sensitive to rate hikes, were holding just below an almost 10-year high of 2.598 percent, on expectations the Federal Reserve will raise rates at least two more times this year.
Concerns about the U.S. deficit and rising government debt needs are also seen as weighing on bonds.
“We had a little bit of a backup overnight with the looming supply in Treasuries," before getting a bit of a bid early in the New York session, said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.
The government will also sell $36 billion in five-year notes on Wednesday and $30 billion in seven-year notes on Thursday, in addition to $16 billion in two-year floating rate notes on Wednesday.
A rally in Italian government bonds reduced the safety bid for U.S. debt early on Tuesday. Italian bonds pared gains, however, after news agency Ansa reported eurosceptic economist Paolo Savona as being the pick as economy minister in a new anti-establishment government.
Italy’s bonds have seen six days of heavy selling on concerns about the high-spending policies mooted by a potential coalition government in the euro zone's third-largest economy.
Demand for this week’s U.S. debt sales will be watched for indications on whether last week’s selloff attracts buyers, or if investors are reticent to buy the debt with further weakness possible.
Benchmark 10-year note yields rose to 3.128 percent on Friday, the highest since July 2011, before falling back to 3.065 percent on Tuesday.
The Fed will release minutes from its May meeting on Wednesday, which will be further evaluated for indications of how many rate hikes are likely this year.
The U.S. central bank left rates unchanged at the meeting and expressed confidence that a recent rise in inflation to near the U.S. central bank's target would be sustained, leaving it on track to raise borrowing costs in June. (Reporting by Karen Brettell, Editing by Andrea Ricci) )