(Recasts with auction results, adds quotes, updates prices)
* Treasury sells $29 bln of seven-year notes
* Spreads between 5-yr, 30-yr yields tightest since 2009
* Fed buys $4.22 bln notes due 2019
NEW YORK, March 27 (Reuters) - U.S. Treasuries held at lower yields on Thursday after the government sold $29 billion of new seven-year notes to strong demand, the final sale of $96 billion in new coupon-bearing supply this week. The notes were sold at a high yield of 2.258 percent, more than a basis point below where they had traded before the auction. Direct bidders, which includes some central banks and large asset managers, bought 33 percent of the notes, higher than their average 19 percent. "The recent auctions have shown a particularly strong investment fund demand both in January and February ... I think what we saw is continuing investment fund demand in the belly of the curve," said John Canavan, fixed income analyst at Stone McCarthy Research Associated in Princeton, New Jersey. Investors may have been lured to the debt by the recent rise in yields, after Federal Reserve Chair Janet Yellen said the 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. "Although there has been some correction the last two days we are still looking at more attractive yields than we had been seeing and there is some sentiment that the initial response to the FOMC meeting has run its course," Canavan said. Seven-year notes were last up 1/32 in price to yield 2.25 percent. The notes' yields have fallen from a three-month high of 2.34 percent on Monday, but remain higher than the 2.14 percent area they traded at before Yellen's comments. The spread between yields of five-year notes and thirty-year bonds narrowed to 179 basis points on Thursday, its tightest in five years. Intermediate-dated debt has underperformed longer-dated bonds since Yellen's comments, as investors adapt to the possibility of earlier rate hikes. Demand for Treasuries heading into the quarter's end this week may also help demand in the auction. Treasuries have been supported by safe-haven buying spurred by ongoing tensions over Ukraine, and as U.S. stocks have struggled. "There is a bid in Treasuries. Part of it is geopolitical, and part is stocks," said Lou Brien, market strategist at DRW Trading in Chicago. Yields briefly rose earlier on Thursday after data showed sturdy growth. The number of Americans filing new claims for unemployment benefits fell unexpectedly last week to its lowest in nearly four months, suggesting a strengthening labor market. U.S. economic growth was 2.6 percent in the fourth quarter, up from the 2.4 percent the Commerce Department estimated last month, reflecting a stronger pace of consumer spending than previously estimated. Benchmark 10-year notes were last unchanged in price to yield 2.70 percent, after edging as high as 2.72 percent immediately after the data. The Fed bought $4.22 billion in notes due in 2019 on Thursday. It will purchase between $1 billion and $1.25 billion in bonds due from 2036 to 2044 on Friday.
(Editing by Bernadette Baum and Nick Zieminski)