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Treasury Department auctions $35 billion of 5-year notes at a high yield of 1.739%

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U.S. Treasury prices fell on Tuesday after the government's auction of new five-year notes met lackluster demand.

The Treasury Department auctioned $35 billion in five-year notes at a high yield of 1.739 percent. The bid-to-cover ratio, an indicator of demand, was 2.39, versus the 2.77 recent average.

Indirect bidders, which include major central banks, were awarded 58.7 percent, below a recent average of 51 percent. Meanwhile direct bidders took home 7.3 percent, compared to a recent average of 14 percent.

Benchmark 10-year notes were last down 27/32 in price to yield 2.24 percent, up from around 2.26 percent earlier. Five-year notes fell 9/32 in price to yield 1.72 percent.

The 30-year Treasury note tumbled 2 7/32 in price, bringing the yield to 2.85 percent.

Yields gained momentum earlier after the Commerce Department revised higher its estimate of gross domestic product growth to a 5.0 percent annual pace from 3.9 percent reported last month, citing stronger consumer and business spending. A gauge of business investment plans, however, was unexpectedly flat in November, suggesting a slowdown in economic growth after a brisk expansion over the last two quarters.

The Commerce Department said non-defense capital goods orders, excluding aircraft, a closely watched proxy for business spending plans, was unchanged after a downwardly revised 1.9 percent drop in October.

Read MoreGood news-bad news: GDP booms, durables sink

"This is spectacularly strong growth," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "But the fact that durable goods orders are slowing the way they are is a little concerning, and doesn't bode positively for (fourth quarter) growth numbers."

That has hurt short and intermediate-dated debt, which are the most sensitive to interest rate increases, relative to 30-year bonds.

In addition,sales declined 1.6 percent to a seasonally adjusted annual rate of 438,000 units. October's sales pace was revised down to 445,000 units from 458,000 units.

Read MoreConsumerspending records biggest gain in months

And U.S. consumer sentiment jumped in December to its highest level in nearly eight years on cheaper gasoline and better job and wage prospects, a survey released on Tuesday showed.

The Treasury saw solid demand for $27 billion in two-year notes on Monday, which sold at the highest yield in three-and-a-half years. The Treasury will also sell $29 billion in seven-year debt on Wednesday