TREASURIES-U.S. 10-year yields touch 5-1/2-month peaks as risk appetite grows

(Adds auction results, analyst comment, updates prices, table)

* U.S. stocks rally supports rise in yields

* U.S. 2-year note auction comes in weaker than expected

* Treasury to sell $34 bln in 5-year notes on Wednesday

NEW YORK, Oct 24 (Reuters) - U.S. benchmark 10-year Treasury note yields rose to their highest in more than five months on Tuesday, in line with gains in the European bond market, with a strong U.S. equity performance also adding to overall risk appetite. U.S. 30-year bond yields also rallied, climbing to a three-week peak, while those on two-year notes were near a recent nine-year high. "Some positive bounce in risk market appears to be the proximate cause," Guy LeBas, chief fixed income strategist, at Janney Montgomery Scott in Philadelphia, said. Wall Street's Dow Jones index touched a record high on Tuesday. Strong earnings and optimism about U.S. President Donald Trump's tax plans underpinned the Dow and S&P, which closed at all-time highs on all five trading days last week. U.S. Treasuries also took their cue from European government bond yields, as those on German Bunds hit two-week peaks. Strong business and bank lending surveys backed a growing view that the European Central Bank will announce a reduction of its monthly bond purchases on Thursday. Thursday's ECB monetary policy meeting has further limited interest in bonds, analysts said. Meanwhile, the Treasury's U.S. two-year note auction was underwhelming. The note picked up a yield of 1.596 percent, higher than that at the bid deadline. The yield was the highest in nine years, suggesting lukewarm demand. There were $71.2 billion in bids for a 2.74 bid-to-cover ratio, the lowest since March, and marginally below last month's 2.88. Indirect bidders, which consist mostly of foreign central banks, took 48.2 percent, slightly better than last month's 44.2 percent, but well below the mid-50s level seen in the first half of 2017. "Not a whole lot of implications for the 5-year, but the result was a bit softer than we expected," said Aaron Kohli, rates strategist, at BMO Capital Markets in New York. Treasury will sell $34 billion in 5-year notes and $15 billion in 2-year floating rate notes on Wednesday. In afternoon trading, 10-year U.S. Treasury note prices were down 9/32, yielding 2.408 percent, up from Monday's 2.375 percent. Earlier, 10-year yields rose to 2.414 percent, the highest since mid-May. U.S. 30-year bond prices fell 21/32, with a yield of 2.923 percent, down from 2.89 percent late on Monday. Thirty-year yields had risen to a three-week high of 2.931 percent. After the auction, U.S. two-year note yields were at 1.576 percent, up from 1.568 percent the previous session. On Monday, two-year yields hit a nine-year peak of 1.589 percent.

Tuesday, Oct. 24 at 1450 EDT (1850 GMT): Price

US T BONDS DEC7 151-22/32 -0-21/32 10YR TNotes DEC7 124-188/256 -0-48/256 Price Current Net yield change (pct) (bps) Three-month bills 1.1075 1.1261 0.028 Six-month bills 1.2475 1.2729 0.008 Two-year note 99-158/256 1.5769 0.009 Three-year note 99-190/256 1.7143 0.013 Five-year note 99-74/256 2.0271 0.020 Seven-year note 99-60/256 2.2448 0.022 10-year note 98-168/256 2.4044 0.029 30-year bond 96-152/256 2.9218 0.032


Last (bps) Net change


U.S. 2-year dollar swap 23.50 0.50


U.S. 3-year dollar swap 22.00 0.25


U.S. 5-year dollar swap 7.50 0.25


U.S. 10-year dollar swap -2.50 0.50


U.S. 30-year dollar swap -29.50 0.75


(Reporting by Gertrude Chavez-Dreyfuss; Editing by Susan Thomas and James Dalgleish)