TREASURIES-Solid demand, but light dealer purchases for two-year notes

(Recasts, adds quote, updates prices)

* Light (Other OTC: LGSXY - news) dealer purchases in two-year note auction

* Treasury to sell $35 billion of five-year notes Wednesday

* Fed buys $1.15 billion of bonds due 2036-2044

By Karen Brettell

NEW YORK (Frankfurt: HX6.F - news) , March 25 (Reuters) - Five-year U.S. Treasuries

yields were steady after the Treasury sold $32 billion new

two-year notes to solid demand on Tuesday, though light

purchases by dealers raised some concerns about how much demand

there will be for Wednesday's five-year note auction.

Short- and intermediate-dated Treasuries have been hammered

since Federal Reserve Chair Janet Yellen said last Wednesday

that the U.S. central bank could raise interest rates six months

after its current bond-buying program ends, suggesting a

potential rate hike could happen as early as spring of 2015.

Two-year note auctions are typically among the most stable

as the relative short-duration of the debt keeps a solid bid for

the notes.

But dealers bought only 37.5 percent of the auction, well

below their average of 49 percent, and they bid the smallest

since December 2008, raising concerns that the prospect of

rising rates is denting some interest in the notes.

That could bode badly for Wednesday's sale of $35 billion in

five-year notes. The intermediate dated debt has seen the

largest selloff since Yellen's comments last Wednesday.

"It's possible we get a repeat performance on the light

dealer participation, but I'm not sure we will get a repeat

performance by the strong buyside to support it," said Thomas

Simons, a money market economist at Jefferies in New York. "If

we had to tilt the risks, I would say it doesn't really bode

particularly well."

The two-year notes sold at a high yield of 0.469 percent,

just below where they had traded before the sale. Indirect

bidders, which includes fund managers and other investors,

bought 40.9 percent of the notes, the largest percentage since

November 2011.

The Treasury will sell $35 billion in five-year notes on

Wednesday and $29 billion in seven-year notes on Thursday, in

addition to $13 billion in reopened two-year floating rate notes

on Wednesday.

Five-year notes yields held firm at around 1.72

percent after Tuesday's auction, down from 1.77 percent on

Monday, the highest level since Jan. 9.

Investors also pulled back on bets that the Treasuries yield

curve will continue to flatten on Tuesday as they prepared for

this week's new supply and as they waited on new economic

releases for further signs over the strength of the U.S.

economy.

"We've moved a lot since Yellen's press conference last

Wednesday. The flattener is a crowded trade; you are seeing

people taking off some positions for event risk," said Charles

Comiskey, head of Treasuries trading at Bank of Nova Scotia in

New York.

On Tuesday, the Commerce Department reported that sales of

new U.S. single-family homes hit a five-month low in February,

but private-sector data showing consumer confidence surged to a

six-year high in March suggested the economy was regaining

momentum after being held back by severe weather.

Durable goods orders for January and the Purchasers

Managers' Index for U.S. services are due on Wednesday, with

other major economic releases this week including gross domestic

product for the fourth quarter on Thursday.

Benchmark 10-year notes were last down 1/32 in

price to yield 2.73 percent, little changed from Monday, and

30-year bonds dropped 8/32 in price to yield 3.59

percent, up from 3.57 percent.

The Fed bought $1.15 billion in bonds due from 2036 to 2044

on Tuesday as part of its ongoing purchase program. It will

purchase between $2.25 billion and $2.75 billion in notes due

from 2021 to 2024 on Wednesday.

(Editing by Chizu Nomiyama and Stephen Powell)