U.S. 5-yr Treasury auction attracts strong demand

NEW YORK Nov 24 (Reuters) - The U.S. government sold $42 billion worth of five-year debt on Tuesday in a surprisingly well bid auction that sends a positive signal ahead of an upcoming seven-year notes offering.

Overall demand was robust, based on the bid-to-cover ratio of 2.81, the highest since September 2007 and above the average of 2.27 over the last year.

The high yield at the auction was below rates prevailing in the when-issued market at the auction deadline, indicating dealers were willing to pay a premium for the bonds.

Demand for Treasuries has been particularly high in recent weeks as financial firms prepare to close their books on 2009, with many eager to book profits from riskier markets now while holding onto safe-haven assets through year-end.

"The continued interest in Treasuries is the result of a lack of alternatives," said Lou Brien, market strategist at DRW Trading in Chicago.

Appetite among foreign and institutional investors, who play a crucial role in financing the U.S. debt, was also high based on the indirect bidding category, which accounted for 61 percent of the sale.

That was above the average of 42 percent over the last year and it also beat the 51 percent in the auctions since June, when figures were boosted by changes in how calculations are made.

Government bond auctions have been watched closely this year due to the huge increase in borrowing by Washington, though a spate of strong sales in recent months has assuaged some concerns for now. (Reporting by Burton Frierson; additional reporting by Richard Leong; Editing by Leslie Adler) ((burton.frierson@thomsonreuters.com;+1 646-223-6292; Reuters Messaging: burton.frierson.reuters.com@reuters.net))