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TREASURIES-Year-end portfolio rebalancing boosts bond prices

(Recasts with price move, adds auction results, quote, updates prices)

* Treasury sees weak demand for $34 billion five-year sale

* Year-end, quarter-end demand boosts prices

NEW YORK, Dec 27 (Reuters) - U.S. Treasuries prices gained on Wednesday as investors rebalanced portfolios before year-end, though the Treasury Department saw weak demand for a $34 billion sale of five-year notes. The rally was seen as likely prompted by portfolio rebalancing with no major catalysts to drive market direction. The buying has been strong since the early morning, said Thomas Simons, a money market economist at Jefferies in New York, noting it is likely pressure for quarter-end, year-end, building up.

Benchmark 10-year notes gained 15/32 in price to

yield 2.413 percent, down from 2.237 percent late on Tuesday. Trading volumes were thin, however, with many traders and investors away after Monday's Christmas holiday and before next Monday's New Year's Day holiday. The rally did not extend to the governments five-year auction. The ratio of bids to the amount of five-year Treasuries

offered was 2.36, the lowest reading since June.

It came after the United States also sold $26 billion in two-year notes on Tuesday to below-average demand. The ratio of bids to the amount of two-year Treasuries offered was 2.52, the lowest reading in a year. The Treasury will also auction $28 billion in seven-year notes on Thursday, the final sale of $88 billion in coupon-bearing supply this week. Short- and intermediate-dated debt is highly sensitive to interest rate hikes and the notes have also been under pressure since October on expectations that the Treasury will increase supply next year as the Federal Reserve reduces its bond purchases. "The two- to five-year space has been underperforming, partly on the Fed and the expectations of hikes and partly on expectations that supply's going to start to increase," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. The Treasury is expected to initially concentrate supply increases in Treasury bills and short- and intermediate-dated notes. The Fed has indicated that an additional three increases are likely next year, though interest rate futures traders are pricing in only two.

(Editing by Will Dunham and David Gregorio)

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