TREASURIES-Yields fall after strong U.S. 5-year note auction

(Recasts; adds auction results, updates prices)

* Treasury sells $35 bln in five-year notes to strong demand

* U.S. sells $13 bln two-year floating-rate notes

* Federal Reserve buys $2.63 bln in notes due 2021-24

NEW YORK, March 26 (Reuters) - U.S. Treasury debt prices extended gains on Wednesday after the government sold $35 billion in new five-year notes amid very strong demand from fund managers and other investors. Indirect bidders bought 50.9 percent of the sale but dealers took only 25.9 percent of the notes, well below their 47 percent average for the last four five-year note auctions. The notes sold at a high yield of 1.715 percent, or about one-and-a-half basis points lower than where they had traded before the auction. "It was well received, there was a very low dealer takedown ... it looks like there was a lot of fund demand and demand from abroad," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. The Treasury will sell $29 billion in seven-year notes on Thursday, the final sale this week of $96 billion in new coupon-bearing supply. The degree of demand for this sale is still uncertain, however, as five-year notes have traditionally had more support from buyers including central banks than have seven-year notes. Short- and intermediate-dated 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 2015. This has raised some fears that yields would have to rise further to attract buyers that are nervous over rising rates. At the same time, the recent increase in yields is seen as making the debt more attractive, especially as investors rebalance their portfolios for quarter-end. Five-year notes were last up 8/32 in price to yield 1.70 percent, down from 1.74 percent earlier on Wednesday. The yields rose as high as 1.77 percent on Tuesday, the highest since Jan. 9, and are up from around 1.54 percent before Yellen's comments a week ago. Seven-year notes gained 10/32 in price to yield 2.25 percent, down from 2.32 percent earlier on Wednesday. They have increased from 2.16 percent before Yellen's comments. Traders expect the new seven-year notes may price at yields of 2.27 percent, according to trading in the "when issued" market. The U.S. benchmark 10-year Treasury note was last up 12/32 in price to yield 2.70 percent, down from 2.74 percent late on Tuesday. Bidding at Wednesday's $13 billion auction of U.S. floating-rate, two-year government debt was also the weakest yet since this security was introduced in January. The bid-to-cover ratio was 4.67, compared with 5.29 in February and 5.67 in January. Non-primary dealers bought about 37 percent of the latest supply, down from 45 percent and 47 percent in February and January, respectively. 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 debt 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 debt yields widened to 1.188 percentage points early on Wednesday from 1.176 percentage points late Tuesday, according to Reuters data. The Fed bought $2.63 billion of notes due from 2021 to 2024 on Wednesday as part of its ongoing purchase program. It will purchase between $3.75 billion and $4.50 billion in notes due in 2018 and 2019 on Thursday.

(Additional reporting by Richard Leong; editing by Nick Zieminski by G Crosse)