* Treasury to sell $35 bln five-year notes
* U.S. to sell $13 bln reopened two-year floating rate notes
* Fed to buy $2.25 bln - $2.75 bln notes due 2021-2024
NEW YORK, March 26 (Reuters) - U.S. Treasuries yields were steady on Wednesday, when the Treasury will sell $35 billion in new supply, as investors evaluated whether a recent increase in five-year note yields will offer attractive return relative to the risks of higher interest rates from the Federal Reserve. A $32 billion sale of two-year notes on Tuesday drew solid overall demand, but low bidding from dealers, raising some concerns that banks and investors may hesitate to buy debt at risk of further selloffs on interest rate policy. Two- and five-year notes have been the worst performers since Federal Reserve Chair Janet Yellen said last Wednesday the U.S. central bank could raise interest rates six months after its current bond-buying program ends, suggesting a potential rate hike as early as spring of 2015. Stabilization of the notes at higher yield levels in recent days, however, may support the sale, said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. "I think we've kind of found a comfort area," he said. Five-year notes were last unchanged in price to yield 1.74 percent. The yields rose as high as 1.77 percent on Tuesday, the highest since January 9, and are up from around 1.54 percent before Yellen's comments a week ago. Traders expect the new notes may price at yields of 1.75 percent, according to trading in the "when issued" market . The Treasury will also sell $13 billion in reopened two-year floating rate notes on Wednesday, which are expected to see strong demand as the floating rate payment will protect against a future rate hike. The U.S. government will sell $29 billion in seven-year notes on Thursday, its final sale of $96 billion in coupon-bearing supply this week. The Fed, meanwhile, will buy between $2.25 billion and $2.75 billion of notes due from 2021 to 2024 on Wednesday as part of its ongoing purchase program. The yield curve also edged higher as investors continued to unwind flattening trades that had sent the spread between five-year note yields and 30-year bond yields to the narrowest levels in over four years. The spread between U.S. and German 10-year bond yields was at its widest level since 2006, after a European Central Bank official on Tuesday said the central bank could exercise several options to temper euro strength and combat inflation. ECB governing council member and Bundesbank chief Jens Weidmann said negative interest rates were an option and quantitative easing was not out of the question. The gap between U.S. and German 10-year yields widened to 1.188 percentage points early Wednesday versus 1.176 points late on Tuesday , according to Reuters data.
(Additional reporting by Richard Leong; Editing by Nick Zieminski)