TREASURIES-Solid bond auction beats summer doldrums

* $39 bln 5-year auction attracts decent demand

* Yield curve flattest since late-July

* Market awaits Thursday's $28 bln, 7-yr auction

By Burton Frierson

NEW YORK, Aug 26 (Reuters) - U.S. Treasuries edged higher on Wednesday as solid demand at a $39 billion auction of five-year government debt offset data suggesting the moribund housing market was stabilizing.

Sales of newly built U.S. single-family homes rose in July to their fastest pace in 10 months, contributing to a slightly heavy tone for bonds for much of the session. See [ID:nN26259327]

But Treasuries held up well in the face of a large sale of five-year debt, with the auction results and placid market reaction suggesting the government was having no problems financing a burgeoning national debt.

"It was more than okay. Both pre- and post-auction you're not seeing much of a move in either direction," said George Goncalves, head of fixed income rates strategy at Cantor Fitzgerald, LP, in New York.

"For such a large slug of money to be taken down in a quiet time of the summer it's pretty noteworthy. It's pretty strong on the whole."

The benchmark 10-year Treasury note US10YT=RR was last trading up 2/32 on the day yielding 3.43 percent versus 3.44 percent on Tuesday.

The existing five-year Treasury note US5YT=RR was up 1/32, yielding 2.44 percent.

The five-year auction was part of this week's $109 billion in bond offerings.

Demand was strong overall, with the bid-to-cover ratio coming in at 2.51. That was well above the average ratio of 2.17 over the previous 12 auctions.

Foreign and institutional investors took 56 percent of the issue, based on the indirect bidding category, which was also above average for the last year, but below June's 63 percent.

The main negative of the sale was that yields came in above market expectations, a so-called "tail," based on trade in the when-issued market just before the auction, but the difference was not large.

"We got a strong indirect bid but there was a modest tail of 1.4 basis points versus the when-issued (market). It's in line with what we saw in yesterday's auction," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

"We can't see in the data to say definitively that there is a pickup to foreign bidding, but it's not that much of a leap (to suggest it). This is good in the financing of the federal deficit and will keep interest rates contained through the summer."

The sale follows Tuesday's $42 billion worth of two-year notes while Thursday's $28 billion offering of seven-year paper is the week's final auction.

Seven-year notes US7YT=RR were trading 2/32 higher on the day, yielding 3.08 percent versus Tuesday's 3.09 percent.

The yield curve is also the flattest since the end of July, based on the difference between two- and 10-year yields. This suggests the market has a preference for longer dated debt and might bode well for the seven-year auction if it continues.

The calm market response to the debt sales so far has been remarkable considering worries that the government might face pressure to pay higher rates to get its borrowing done.

The U.S. national debt will nearly double over the next 10 years, government forecasts showed on Tuesday, and may approach $20 trillion by the end of that period.

In the current fiscal year, which ends Sept. 30, the government is expected to issue $1.5 to $2.05 trillion in new bonds, though this would decrease by about $500 billion next fiscal year, according to estimates released earlier this month.

(Additional Reporting by Richard Leong, Editing by Chizu Nomiyama)